UNITED STATES
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
Commission File Number
0-2525
Huntington Bancshares Incorporated
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number
(614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
There were 231,105,691 shares of Registrant’s without par value common stock
outstanding on October 31, 2004.
Huntington Bancshares Incorporated
INDEX
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Part 1. Financial Information
Item 1. Financial Statements
Huntington Bancshares
Incorporated
See notes to unaudited condensed consolidated financial statements
3
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Income
See notes to unaudited condensed consolidated financial statements
4
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Changes in Shareholders’ Equity
See notes to unaudited consolidated financial statements.
5
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Cash Flows
See notes to unaudited condensed consolidated financial statements.
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Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Huntington Bancshares Incorporated (Huntington) reflect all adjustments
consisting of normal recurring accruals, which are, in the opinion of
Management, necessary for a fair presentation of the consolidated financial
position, the results of operations, and cash flows for the periods presented.
These unaudited condensed consolidated financial statements have been prepared
according to the rules and regulations of the Securities and Exchange
Commission (SEC) and, therefore, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States (GAAP) have been
omitted. The Notes to the Consolidated Financial Statements appearing in
Huntington’s 2003 Annual Report on Form 10-K (2003 Form 10-K), which include
descriptions of significant accounting policies, as updated by the information
contained in this report, should be read in conjunction with these interim
financial statements.
Certain amounts in the prior year’s financial statements have been
reclassified to conform to the 2004 presentation.
For statement of cash flows purposes, cash and cash equivalents are
defined as the sum of “Cash and due from banks” and “Federal funds sold and
securities purchased under resale agreements.” The statement of cash flows for
the nine-months ended September 30, 2003, has been corrected to properly
reflect the sale of branch offices during the third quarter of 2003.
Note 2 – New Accounting Pronouncements
Emerging Issues Task Force Issue No. 03-1,
The Meaning of Other-Than-Temporary
Impairments and Its Application to Certain Investments
(EITF 03-1):
The
Emerging Issues Task Force reached a consensus about the criteria that should
be used to determine when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an impairment loss.
EITF 03-1 also included accounting considerations subsequent to the recognition
of an other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. On September 30, 2004, the FASB issued FSP 03-1-1 which delayed
the effective date for the measurement and recognition guidance contained in
paragraphs 10–20 of Issue 03-1 due to additional proposed guidance expected to be finalized in the fourth quarter of 2004.
At September 30, 2004, Huntington had $2.5 billion of debt securities with
current market values less than their amortized cost. These debt securities had
an aggregate unrealized loss of $32.7 million at September 30, 2004. None of
these securities were equity securities or debt securities that can
contractually be prepaid or otherwise settled in such a way that Huntington
would not recover substantially all of its cost. At September 30, 2004, a
total of $26.8 million of these debt securities had market values that were 5%
or more below their amortized cost. The aggregate unrealized loss for these
securities was $1.5 million. The declines in value are the result of interest
rate fluctuations and Huntington believes the declines are temporary;
therefore, no impairment loss has been recorded except as described in the
paragraph below. Until the final FSP 03-1-1 is finalized, Huntington cannot
determine the impact that the proposed guidance might have on the financial
statements.
At September 30, 2004, Management made a decision, to sell $11 million of
equity securities, with unrealized losses of $0.9 million. Consequently,
Huntington recognized the unrealized losses in the third quarter of 2004.
Emerging Issues Task Force Issue No. 03-16,
Accounting for Investment in
Limited Liability Companies
(EITF 03-16):
The Task Force reached a consensus
that an investment in a limited liability company (LLC) that maintains a
“specific ownership account” for each investor should be viewed as similar to
an investment in a limited partnership for purposes of determining whether a
noncontrolling investment in a LLC should be accounted for using the cost
method or the equity method. The current rules require a noncontrolling
investment in a limited partnership to be accounted for under the equity method
unless the interest is so minor that the limited partner may have virtually no
influence over the partnership operating and financial policies. The guidance
for evaluating an investment in a LLC should be applied for reporting periods
beginning after June 15, 2004. The impact of EITF 03-16 was not material to
Huntington’s financial condition, results of operations, or cash flows.
SEC Staff Accounting Bulletin No. 105,
Application of Accounting Principles to
Loan Commitments
(SAB 105):
On March 9, 2004, the SEC issued SAB 105, which
summarizes the views of the SEC staff regarding the application of
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generally accepted accounting principles to loan commitments accounted for as
derivative instruments. Specifically, SAB 105 indicated that the fair value of
loan commitments that are required to follow derivative accounting under FAS
133,
Accounting for Derivative Instruments and Hedging Activities
, should not
consider the expected future cash flows related to the associated servicing of
the future loan. Prior to SAB 105, Huntington did not consider the expected
future cash flows related to the associated servicing in determining the fair
value of loan commitments. The adoption of SAB 105 did not have a material
effect on Huntington’s financial results.
FASB Staff Position No. 106-2,
Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(FSP 106-2):
In December 2003, a law was approved that expands Medicare
benefits, primarily adding a prescription drug benefit for Medicare-eligible
retirees beginning in 2006. The law also provides a federal subsidy to
companies that sponsor postretirement benefit plans providing prescription drug
coverage. FSP 106-2 was issued in May 2004 and supersedes FSP 106-1 issued in
January 2004. FSP 106-2 specifies that any Medicare subsidy must be taken into
account in measuring the employer’s postretirement health care benefit
obligation and will also reduce the net periodic postretirement cost in future
periods. The new guidance is effective for the reporting periods beginning on
or after June 15, 2004. The impact of this new pronouncement was not material
to Huntington’s financial condition, results of operations, or cash flows.
AICPA Statement of Position No. 03-3,
Accounting for Certain Loans or Debt
Securities Acquired in a Transfer
(SOP 03-3):
In December 2003, the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants issued SOP 03-3 to address accounting for differences between the
contractual cash flows of certain loans and debt securities and the cash flows
expected to be collected when loans or debt securities are acquired in a
transfer and those cash flow differences are attributable, at least in part, to
credit quality. As such, SOP 03-3 applies to loans and debt securities
purchased or acquired in purchase business combinations and does not apply to
originated loans. The application of SOP 03-3 limits the interest income,
including accretion of purchase price discounts, that may be recognized for
certain loans and debt securities. Additionally, SOP 03-3 requires that the
excess of contractual cash flows over cash flows expected to be collected
(nonaccretable difference) not be recognized as an adjustment of yield or
valuation allowance, such as the allowance for credit losses. Subsequent to the
initial investment, increases in expected cash flows generally should be
recognized prospectively through adjustment of the yield on the loan or debt
security over its remaining life. Decreases in expected cash flows should be
recognized as impairment. SOP 03-3 is effective for loans and debt securities
acquired in fiscal years beginning after December 15, 2004, with early
application encouraged. The impact of this new pronouncement is not expected to
be material to Huntington’s financial condition, results of operations, or cash
flows.
Note 3 – Securities and Exchange Commission Investigation
As previously disclosed, Huntington continues to have ongoing discussions
with the staff of the Securities and Exchange Commission (SEC) regarding
resolution of its formal investigation into certain financial accounting
matters relating to fiscal years 2002 and earlier and certain related
disclosure matters. It is anticipated that a settlement of this matter will
involve the entry of an order by the SEC requiring Huntington to comply with
various provisions of the Securities Exchange Act of 1934 and the Securities
Act of 1933, along with the imposition of a civil money penalty. No assurances, however, can be provided
as to the ultimate timing or outcome of this matter pending a final
settlement.
Note 4 – Formal Supervisory Agreements and Impact on Pending Acquisition
On November 3, 2004, Huntington announced that it expects to enter into
formal supervisory agreements with its banking regulators, the Federal Reserve
and the Office of the Controller of the Currency, providing for a comprehensive
action plan designed to address its financial reporting and accounting
policies, procedures, and controls and its corporate governance practices.
Huntington remains in active dialogue with banking regulators concerning these
and related matters and is working diligently to resolve this in a full and
comprehensive manner.
On January 27, 2004, Huntington announced the signing of a definitive
agreement to acquire Unizan Financial Corp. (Unizan), a financial holding
company based in Canton, Ohio, with $2.7 billion of assets at December 31,
2003. Under the terms of the agreement, Unizan shareholders would receive 1.1424
shares of Huntington common stock, on a tax-free basis, for each share of
Unizan.
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As part of its November 3, 2004, announcement, Huntington indicated that
it is negotiating a one-year extension of its merger agreement with Unizan.
Huntington intends to withdraw its current application with the Federal Reserve
to acquire Unizan and to resubmit the application for regulatory approval of
the merger once it has successfully resolved the aforementioned regulatory
concerns.
Huntington believes that it will be able to address all of the issues that have been raised by its banking regulators and the SEC (see Note 3) concerning these matters in a comprehensive
manner and is working aggressively to do so. No assurances, however, can be provided as to the ultimate timing or
outcome of these matters.
Note 5 – Stock Repurchase Plan
Effective April 27, 2004, the board of directors authorized a new share
repurchase program (the 2004 Repurchase Program) which cancelled the 2003
Repurchase Program and authorized Management to repurchase not more than
7,500,000 shares of Huntington common stock. Purchases will be made from
time-to-time in the open market or through privately negotiated transactions
depending on market conditions. As of September 30, 2004, there have been no
Note 6 – Operating Lease Assets
Operating lease assets at September 30, 2004, December 31, 2003, and
September 30, 2003, were as follows:
Depreciation related to operating lease assets was $54.6 million and $86.5
million for the three months ended September 30, 2004 and 2003, respectively.
For the respective nine-month periods, depreciation was $187.0 million and
$290.5 million.
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Note 7 – Investment Securities
Listed below are the contractual maturities (under 1 year, 1-5 years, 6-10
years and over 10 years) of investment securities at September 30, 2004,
December 31, 2003, and September 30, 2003:
10
The growth in the Asset Backed Securities from year-end and the year-ago
quarter primarily consisted of over 10-year variable-rate securities.
Note 8 – Segment Reporting
Huntington has three distinct lines of business: Regional Banking, Dealer
Sales, and the Private Financial Group (PFG). A fourth segment includes the
company’s Treasury functions and capital markets activities and other
unallocated assets, liabilities, revenue, and expense. Lines of business
results are determined based upon the company’s management reporting system,
which assigns balance sheet and income statement items to each of the business
segments. The process is designed around Huntington’s organizational and
management structure and, accordingly, the results below are not necessarily
comparable with similar information published by other financial institutions.
A description of each segment and discussion of financial results is provided
below.
Regional Banking:
This segment provides products and services to retail,
business banking, and commercial customers. These products and services are
offered in seven operating regions within the five states of Ohio, Michigan,
West Virginia, Indiana, and Kentucky through the company’s traditional banking
network. Each region is further divided into Retail and Commercial Banking
units. Retail products and services include home equity loans and lines of
credit, first mortgage loans, direct installment loans, business loans,
personal and business deposit products, as well as sales of investment and
insurance services. Retail products and services comprise 59% and 80% of total
Regional Banking loans and deposits, respectively. These products and services
are delivered to customers through banking offices, ATMs, Direct
Bank—Huntington’s customer service center, and Web Bank at huntington.com.
Commercial banking serves middle-market and commercial banking relationships,
which use a variety of banking products and services including commercial
loans, international trade, cash management, leasing, interest rate protection
products, capital market alternatives, 401(k) plans, and mezzanine investment
capabilities.
Dealer Sales:
This segment serves over 3,500 automotive dealerships within
Huntington’s primary banking markets as well as in Arizona, Florida, Georgia,
Pennsylvania, and Tennessee. The segment finances the purchase of automobiles
by consumers of the automotive dealerships, purchases automobiles from dealers
and simultaneously leases the automobiles under long-term direct financing
leases to consumers, finances dealership floor plan inventories, real estate,
or working capital needs, and provides other banking services to the automotive
dealerships and their owners.
Private Financial Group:
This segment provides products and services designed
to meet the needs of the company’s higher net worth customers. Revenue is
derived through trust, asset management, investment advisory, brokerage,
insurance, and private banking products and services.
Treasury/Other:
This segment includes revenue and expense related to assets,
liabilities, and equity that are not directly assigned or allocated to one of
the other three business segments. Assets included in this segment include
investment securities, bank owned life insurance, and mezzanine loans
originated through Huntington Capital Markets. A match-funded transfer pricing
system is used to attribute appropriate interest income and interest expense to
other business segments. This segment includes the net impact of interest rate
risk management, including derivative activities. Furthermore, this segment’s
results include the earnings from the company’s investment securities
portfolios and capital markets activities. Additionally, income or expense and
provision for income taxes, not allocated to other business segments, are also
included.
Use of Operating Earnings to Measure Segment Performance
Management uses earnings on an operating basis, rather than on a GAAP
basis, to measure underlying performance trends for each business segment.
Analyzing earnings on an operating basis is very helpful in assessing
underlying performance trends, a critical factor used by Management to
determine the success of strategies and future earnings capabilities.
Operating earnings represent GAAP earnings adjusted to exclude the impact of
the significant items listed in the reconciliation table below. See Note 12 for
further discussions regarding Restructuring Reserves.
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Listed below is certain reported financial information reconciled to
Huntington’s three and nine month 2004 and 2003 operating results by line of
business.
12
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Note 9 – Comprehensive Income
The components of Huntington’s Other Comprehensive Income in the three and
nine months ended September 30 were as follows:
Activity
in Accumulated Other Comprehensive Income for the nine months ended
September 30, 2004 and 2003 was as follows:
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Note 10 – Earnings per Share
Basic earnings per share is the amount of earnings for the period
available to each share of common stock outstanding during the reporting
period. Diluted earnings per share is the amount of earnings available to each
share of common stock outstanding during the reporting period adjusted for the
potential issuance of common shares upon the exercise of stock options. The
calculation of basic and diluted earnings per share for each of the three and
nine months ended September 30 is as follows:
The average market price of Huntington’s common stock for the period was
used in determining the dilutive effect of outstanding stock options. Common
stock equivalents are computed based on the number of shares subject to stock
options that have an exercise price less than the average market price of
Huntington’s common stock for the period.
Stock options for approximately 2.5 million and 6.4 million shares were
vested and outstanding at September 30, 2004 and 2003, respectively, but were
not included in the computation of diluted earnings per share because the
options’ exercise price was greater than the average market price of the common
shares for the period and, therefore, the effect would be antidilutive. The
weighted average exercise price for these options was $27.04 per share and
$23.19 per share at the end of the same respective periods.
On July 30, 2004, Huntington entered into an agreement with the former
shareholders of LeaseNet, Inc. to issue in early 2005 up to 86,118 shares of
Huntington common stock previously held in escrow subject to LeaseNet meeting
certain contractual performance criteria. A total of 366,576 common shares,
previously held in escrow, will be returned to Huntington. All shares in
escrow had been accounted for as treasury stock.
On September 4, 2001, options totaling 3.2 million shares of common stock
were granted to, with certain specified exceptions, full- and part-time
employees under the Huntington Bancshares Incorporated Employee Stock Incentive
Plan (the “Incentive Plan”). Under the terms of the Incentive Plan, these
options were to vest on the earlier of September 4, 2006, or at such time as
the closing price for Huntington’s common stock for five consecutive trading
days reached or exceeded $25.00. Huntington’s common stock closing price
exceeded $25.00 for each of the five consecutive trading days beginning October
1, 2004, and ending October 7, 2004. As a result, options for 2.0 million
shares of common stock granted under the Incentive Plan, net of options for 1.2
million shares cancelled due to employee attrition, became fully vested and
exercisable after the close of trading on October 7, 2004.
Note 11 – Stock-Based Compensation
Huntington’s stock-based compensation plans are accounted for based on the
intrinsic value method promulgated by APB Opinion 25,
Accounting for Stock
Issued to Employees
, and related interpretations. Compensation expense for
employee stock options is generally not recognized if the exercise price of the
option equals or exceeds the fair value of the stock on the date of grant.
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The following pro forma disclosures for net income and earnings per
diluted common share is presented as if Huntington had applied the fair value
method of accounting of Statement No. 123 in measuring compensation costs for
stock options. The fair values of the stock options granted were estimated
using the Black-Scholes option-pricing model. This model assumes that the
estimated fair value of the options is amortized over the options’ vesting
periods and the compensation costs would be included in personnel expense on
the income statement. The following table also includes the weighted-average
assumptions that were used in the option-pricing model for options granted in
each of the quarters presented:
Note 12 – Restructuring Reserves
On a quarterly basis, Huntington assesses its remaining restructuring
reserves, primarily related to lease obligations, and makes adjustments to
those reserves as necessary. Based on these assessments, Huntington released
$1.2 million in the third quarter of 2004. Huntington had remaining reserves
for restructuring of $5.1 million, $9.7 million, and $8.7 million, as of
September 30, 2004, December 31, 2003, and September 30, 2003, respectively.
Huntington expects that the reserves will be adequate to fund the estimated
future cash outlays.
Note 13 – Benefit Plans
Huntington sponsors the Huntington Bancshares Retirement Plan (the Plan),
a non-contributory defined benefit pension plan covering substantially all
employees. The Plan provides benefits based upon length of service and
compensation levels. The funding policy of Huntington is to contribute an
annual amount that is at least equal to the minimum funding requirements but
not more than that deductible under the Internal Revenue Code. Although not
required, Huntington made a discretionary contribution of $44.6 million to the
Plan during the third quarter of 2004. In addition, Huntington has an
unfunded, defined benefit post-retirement plan that provides certain healthcare
and life insurance benefits to retired employees who have attained the age of
55 and have at least 10 years of vesting service under this plan. For any
employee retiring on or after January 1, 1993, post-retirement healthcare
benefits are based upon the employee’s number of months of service and are
limited to the actual cost of coverage. Life insurance benefits are a
percentage of the employee’s base salary at the time of retirement, with a
maximum of $50,000 of coverage.
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The following table shows the components of net periodic benefit expense:
Huntington also sponsors other retirement plans. One of those plans is an
unfunded Supplemental Executive Retirement Plan. This plan is a nonqualified
plan that provides certain former officers of Huntington and its subsidiaries
with defined pension benefits in excess of limits imposed by federal tax law.
Other plans, including plans assumed in various past acquisitions, are
unfunded, nonqualified plans that provide certain active and former officers of
Huntington and its subsidiaries nominated by Huntington’s compensation
committee with deferred compensation, post-employment, and/or defined pension
benefits in excess of the qualified plan limits imposed by federal tax law.
Huntington has a 401(k) plan, which is a defined contribution plan that is
available to eligible employees. Matching contributions by Huntington equal
100% on the first 3%, then 50% on the next 2%, of participant elective
deferrals. The cost of providing this plan was $2.3 million and $2.1 million
for the three months ended September 30, 2004 and 2003, respectively. For the
respective nine-month periods, the cost was $7.0 million and $6.5 million.
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Note 14 – Commitments and Contingent Liabilities
Commitments
:
In the ordinary course of business, Huntington makes various commitments
to extend credit that are not reflected in the financial statements. The
contract amount of these financial agreements at September 30, 2004, December
31, 2003, and September 30, 2003, were as follows:
Commitments to extend credit generally have fixed expiration dates, are
variable-rate, and contain clauses that permit Huntington to terminate or
otherwise renegotiate the contracts in the event of a significant deterioration
in the customer’s credit quality. These arrangements normally require the
payment of a fee by the customer, the pricing of which is based on prevailing
market conditions, credit quality, probability of funding, and other relevant
factors. Since many of these commitments are expected to expire without being
drawn upon, the contract amounts are not necessarily indicative of future cash
requirements. The interest rate risk arising from these financial instruments
is insignificant as a result of their predominantly short-term, variable-rate
nature.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. These guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. Most of these
arrangements mature within two years. The carrying amount of deferred revenue
associated with these guarantees was $3.9 million, $3.8 million, and $3.9
million at September 30, 2004, December 31, 2003, and September 30, 2003,
respectively.
Commercial letters of credit represent short-term, self-liquidating
instruments that facilitate customer trade transactions and generally have
maturities of no longer than 90 days. The merchandise or cargo being traded
normally secures these instruments.
Litigation:
In the ordinary course of business, there are various legal proceedings
pending against Huntington and its subsidiaries. In the opinion of management,
the aggregate liabilities, if any, arising from such proceedings are not
expected to have a material adverse effect on Huntington’s consolidated
financial position. (See also Note 3.)
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
INTRODUCTION
Huntington Bancshares Incorporated (Huntington or the company) is a
multi-state diversified financial holding company organized under Maryland law
in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries,
Huntington is engaged in providing full-service commercial and consumer banking
services, mortgage banking services, automobile financing, equipment leasing,
investment management, trust services, and discount brokerage services, as well
as reinsuring credit life and disability insurance, and selling other insurance
and financial products and services. Huntington’s banking offices are located
in Ohio, Michigan, West Virginia, Indiana, and Kentucky. Selected financial
services are also conducted in other states including Arizona, Florida,
Georgia, Maryland, New Jersey, Pennsylvania, and Tennessee. Huntington has a
foreign office in the Cayman Islands and a foreign office in Hong Kong. The
Huntington National Bank (the Bank), organized in 1866, is Huntington’s only
bank subsidiary.
The following discussion and analysis provides investors and others with
information that Management believes to be necessary for an understanding of
Huntington’s financial condition, changes in financial condition, results of
operations, and cash flows, and should be read in conjunction with the
financial statements, notes, and other information contained in this report.
Forward-Looking Statements
This report, including Management’s Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements about
Huntington. These include descriptions of products or services, plans or
objectives of Management for future operations, including pending acquisitions,
and forecasts of revenues, earnings, cash flows, or other measures of economic
performance. Forward-looking statements can be identified by the fact that they
do not relate strictly to historical or current facts.
By their nature, forward-looking statements are subject to numerous
assumptions, risks, and uncertainties. A number of factors could cause actual
conditions, events, or results to differ significantly from those described in
the forward-looking statements. These factors include, but are not limited to,
those set forth below and under the heading “Business Risks” included in Item 1
of Huntington’s Annual Report on Form 10-K for the year ended December 31, 2003
(2003 Form 10-K), and other factors described in this report and from
time-to-time in other filings with the Securities and Exchange Commission.
Management encourages readers of this report to understand forward-looking
statements to be strategic objectives rather than absolute forecasts of future
performance. Forward-looking statements speak only as of the date they are
made. Huntington assumes no obligation to update forward-looking statements to
reflect circumstances or events that occur after the date the forward-looking
statements were made or to reflect the occurrence of unanticipated events.
Risk Factors
Huntington, like other financial companies, is subject to a number of
risks, many of which are outside of Management’s control, though Management
strives to manage those risks while optimizing returns. Among the risks assumed
are: (1) credit risk, which is the risk that loan and lease customers or other
counter parties will be unable to perform their contractual obligations, (2)
market risk, which is the risk that changes in market rates and prices will
adversely affect Huntington’s financial condition or results of operations, (3)
liquidity risk, which is the risk that Huntington and / or the Bank will have
insufficient cash or access to cash to meet operating needs, and (4)
operational risk, which is the risk of loss resulting from inadequate or failed
internal processes, people, or systems, or external events. The description of
Huntington’s business contained in Item 1 of its 2003 Form 10-K, while not all
inclusive, discusses a number of business risks that, in addition to the other
information in this report, readers should carefully consider.
Formal Supervisory Agreements and Securities and Exchange Commission
Investigation
On November 3, 2004, Huntington announced that it expects to enter into
formal supervisory agreements with its banking regulators, the Federal Reserve
and the Office of the Controller of the Currency, providing for a comprehensive
action plan designed to address its financial reporting and accounting
policies, procedures, and controls and its corporate governance practices.
Huntington remains in active dialogue with its banking regulators concerning
these and related matters.
As part of its November 3, 2004, announcement, Huntington indicated that
it is negotiating a one-year extension of its merger agreement with Unizan.
Huntington intends to withdraw its current application with the Federal Reserve
to
19
acquire Unizan and to resubmit the application for regulatory approval of
the merger once it has successfully resolved the aforementioned regulatory
concerns.
As previously disclosed, Huntington continues to have ongoing discussions
with the staff of the Securities and Exchange Commission (SEC) regarding
resolution of its formal investigation into certain financial accounting
matters relating to fiscal years 2002 and earlier and certain related
disclosure matters. It is anticipated that a settlement of this matter will
involve the entry of an order by the SEC requiring Huntington to comply with
various provisions of the Securities Exchange Act of 1934 and the Securities
Act of 1933, along with the imposition of a civil money penalty.
Huntington’s
Board of Directors has been overseeing a review of the Company’s
financial accounting and reporting practices as they relate to the
Company’s previous accounting restatements and other related
matters during the course of the pending SEC formal investigation. It has recently
engaged the Promontory Financial Group to provide assistance with
respect to these and related regulatory matters.
Huntington believes that it will be able to address all of the issues that
have been raised by the SEC and its banking regulators concerning these matters
in a comprehensive manner and is working aggressively to do so. No assurances,
however, can be provided as to the ultimate timing or outcome of these matters
pending a final settlement.
Critical Accounting Policies and Use of Significant Estimates
Huntington’s 2003 Form 10-K lists Critical Accounting Policies and Use of
Significant Estimates used in the development and presentation of its financial
statements. These significant accounting policies, as well as the following
discussion and analysis and other financial statement disclosures, identify and
address key variables and other qualitative and quantitative factors that are
necessary for an understanding and evaluation of Huntington, its financial
position, results of operations, and cash flows.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (GAAP) requires Huntington’s
Management to establish critical accounting policies and make accounting
estimates, assumptions, and judgments that affect amounts recorded and reported
in its financial statements. An accounting estimate requires assumptions about
uncertain matters that could have a material effect on the financial statements
of Huntington if a different amount within a range of estimates were used or if
estimates changed from period to period. Readers of this interim report should
understand that estimates are made under facts and circumstances at a point in
time and changes in those facts and circumstances could produce actual results
that differ from when those estimates were made. Huntington’s Management has
identified the most significant accounting estimates and their related
application in Huntington’s 2003 Form 10-K.
SUMMARY DISCUSSION OF RESULTS
Earnings comparisons from the first nine-months of 2003 through the first
nine-months of 2004, including comparisons of third quarter of 2003 with the
third quarter of 2004 performance, were impacted by a number of factors, some
related to changes in the economic and competitive environment, while others
reflected specific Management strategies or changes in accounting practices.
Understanding the nature and implications of these factors on financial results
is important in understanding the company’s income statement, balance sheet,
and credit quality trends and the comparison of the current quarter and
year-to-date performance with comparable prior-year periods. The key factors
impacting the current reporting period comparisons are more fully described in
the Significant Factors Influencing Financial Performance Comparisons section,
which follows the summary of results below.
2004 Third Quarter versus 2003 Third Quarter
Huntington’s 2004 third quarter earnings were $93.5 million, or $0.40 per
common share, both up 3% from $90.9 million and $0.39 per common share in the
year-ago quarter. This $2.6 million increase in earnings primarily reflected:
Partially offset by:
20
The return on average assets (ROA) and return on average equity (ROE),
were 1.18% and 15.4%, respectively, down from 1.38% and 18.5%, respectively, in
the year-ago quarter (see Table 1).
2004 Third Quarter versus 2004 Second Quarter
Compared with 2004 second quarter net income of $110.1 million and $0.47
per common share, 2004 third quarter earnings and earnings per share were both
down 15%. This $16.6 million decrease in earnings primarily reflected:
Partially offset by:
The ROA and ROE were 1.18% and 15.4%, respectively, in the current
quarter, down from 1.41% and 19.1%, respectively, in the prior quarter (see
Table 1).
2004 First Nine Months versus 2003 First Nine Months
Earnings for the first nine months of 2004 were $307.8 million, or $1.32
per common share, up 10% and 9%, respectively, from the comparable year-ago
period earnings of $279.1 million or $1.21 per common share. This $28.7
million increase in earnings primarily reflected:
Partially offset by:
The ROA and ROE were 1.32% and 17.6%, respectively, in the current nine-month
period, down slightly from 1.37% and 17.9%, respectively, in the comparable
year-ago period (see Table 2).
21
Table 1 — Selected Quarterly Income Statement Data
N.M.
- Not Meaningful.
22
Table 2 - Selected YTD Income Statement Data
N.M. - Not Meaningful.
23
Significant Factors Influencing Financial Performance Comparisons
Earnings comparisons from the first nine months of 2003 through the first
nine months of 2004 were impacted by a number of factors, some related to
changes in the economic and competitive environment, while others reflected
specific Management strategies or changes in accounting practices. Those key
factors are summarized below.
24
25
The following table quantifies the earnings impact of changes in SEC
related expenses / accruals, Unizan system conversion expenses, MSR and
investment securities and trading account valuations, gains on sales of
automobile loans, restructuring reserve releases, sale of the West Virginia
banking offices, and a single, large commercial credit recovery on the
Table
3 - Significant Items Influencing Earnings Performance Comparisons
26
RESULTS OF OPERATIONS
Net Interest Income
2004 Third Quarter versus 2003 Third Quarter
Fully taxable equivalent net interest income increased $6.9 million, or
3%, from the year-ago quarter, reflecting the favorable impact of an 8%
increase in average earning assets, partially offset by a 16 basis point, or an
effective 5%, decline in the net interest margin. The fully taxable equivalent
net interest margin decreased to 3.30% from 3.46%, reflecting the impact of
lower rates and the strategic repositioning of portfolios to reduce automobile
loans and to increase the relative proportion of lower-rate, and lower-risk,
residential real estate-related loans and investment securities.
Average total loans and leases increased $1.7 billion, or 8%, from the
2003 third quarter due primarily to a $1.3 billion, or 11%, increase in average
consumer loans. Contributing to the consumer loan growth was a $1.8 billion,
or 84%, increase in average residential mortgages and a $0.5 billion, or 15%,
increase in average home equity loans. Demand for residential mortgages and
home equity loans remained strong during this twelve month period as interest
rates remained near historically low levels. Average total automobile loans
and leases decreased $1.1 billion, or 21%. This decline from the year-ago
quarter reflected the sale of $2.6 billion of automobile loans over this
12-month period, partially offset by the rapid growth in direct financing
leases due to the migration from operating lease assets, which have not been
originated since April 2002.
During the third quarter, $153 million of automobile loans were sold,
including $102 million of automobile loans transferred to loans held for sale
during the 2004 second quarter. Combined, these transactions resulted in third
quarter net pre-tax gains on the sale of automobile loans of $0.3 million. On
a combined basis, these transactions increased the total automobile loans sold
since the beginning of 2003 to $3.7 billion. These sales represented a
continuation of a strategy to reduce exposure to automobile financing to
approximately 20% of total credit exposure (see Table 10). At September 30,
2004, this exposure was $4.9 billion, down from $6.2 billion at year end and
represented 21% of total credit exposure, down from 28% at year end 2003, and
30% at September 30, 2003.
Average total commercial and industrial (C&I) and commercial real estate
(CRE) loan balances were $9.8 billion, up $0.4 billion, or 5%, from the
year-ago quarter. This $9.8 billion consisted of middle-market C&I ($4.3
billion, down from $4.5 billion), middle market CRE ($3.5 billion, up from $3.1
billion), and small business C&I and CRE ($1.9 billion) loans. Small business
C&I and CRE loans increased $188 million, or 11%. Middle-market C&I and CRE
balances were impacted by a June 30, 2004 reclassification of $282 million of
C&I loans to CRE loans. Adjusting for this reclassification, average
middle-market C&I loans increased $93 million, or 2%, from the year-ago quarter
and middle-market CRE loans increased $143 million, or 4%.
Average investment securities increased $0.7 billion, or 18%, from the
year-ago quarter. This increase reflected the use of some of the proceeds from
the previous sales of automobile loans to purchase 10-year variable rate
securities.
Average total core deposits in the third quarter were $16.5 billion, up
$0.7 billion, or 4%, from the year-ago quarter, reflecting a $0.8 billion, or
13%, increase in average interest bearing demand deposit accounts, partially
offset by a $0.1 billion, or 6%, decline in retail CDs.
Tables 4 and 5 reflect quarterly average balance sheets and rates earned
and paid on interest-earning assets and interest-bearing liabilities:
27
Table 4 — Condensed Consolidated Quarterly Average Balance Sheets
N.M. - Not Meaningful
28
Table 5 - Consolidated
Quarterly Net Interest Margin Analysis
29
2004 Third Quarter versus 2004 Second Quarter
Compared with the 2004 second quarter, fully taxable equivalent net
interest income increased $4.4 million, or 2%, reflecting the favorable impact
of a 1% increase in average earning assets and a one basis point increase in
the net interest margin to 3.30% from 3.29%.
Compared with the second quarter, average total loans and leases increased
$0.4 billion, or 2%, with the growth rate mitigated by a $0.5 billion, or 21%,
decline in average automobile loans due to the second quarter ($512 million)
and third quarter ($153 million) sales of automobile loans. Growth in
mortgage-related consumer loans remained strong with average residential
mortgages up $0.6 billion, or 17%, and average home equity loans up $0.1
billion, or 4%. Total average C&I and CRE loans increased slightly, primarily
reflecting a $63 million, or 3%, increase in small business C&I and CRE loans.
As discussed above, middle-market C&I and CRE loan balances were impacted by
the $282 million loan reclassification on June 30, 2004. Adjusting for this
reclassification, third quarter average middle-market C&I and CRE loans were
essentially flat.
Compared with the second quarter, average investment securities declined
$0.5 billion, or 10%.
Compared with the 2004 second quarter, average total core deposits
increased $0.3 billion, or 2%, reflecting growth in interest bearing demand
deposits, up $0.2 billion, or 3%, as well as non-interest bearing deposits, up
$0.1 billion, or 2%.
2004 First Nine Months versus 2003 First Nine Months
Fully taxable equivalent net interest income for the first nine months of
2004 increased $49.7 million, or 8%, from the comparable year-ago period,
reflecting the favorable impact of a 14% increase in average earning assets,
partially offset by a 21 basis point, or an effective 6%, decline in the net
interest margin. The fully taxable equivalent net interest margin decreased to
3.31% from 3.52%, reflecting the impact of lower rates and the strategic
repositioning of portfolios to reduce automobile loans and increase the
relative proportion of lower-rate, and lower-risk, residential real
estate-related loans and investment securities.
Average total loans and leases increased $2.3 billion, or 12%, from the
first nine months of 2003 due primarily to a $2.0 billion, or 19%, increase in
average consumer loans. Contributing to the consumer loan growth was a $1.4
billion, or 72%, increase in average residential mortgages and a $0.5 billion,
or 15%, increase in average home equity loans. Average total automobile loans
and leases increased $0.1 billion, or 1%. This growth from the year-ago,
nine-month period reflected the positive impact of underlying new automobile
loan originations, the 2003 third quarter consolidation of a $1.0 billion
automobile loan securitization trust, and the rapid growth in direct financing
leases due to the migration from operating lease assets, which are no longer
being originated. Partially offsetting these positive impacts was the sale of
automobile loans over this period.
Average total C&I and CRE loans in the first nine months of 2004 increased
$0.3 billion, or 3%, from the comparable year-ago period reflecting an 11%
increase in small business C&I and CRE loans, and a 11% increase in
middle-market CRE loans. Average middle-market C&I loans were down 5% from the
year-ago period and reflected both weak demand and the impact from continued
strategies to specifically lower exposure to large individual commercial
credits, including shared national credits.
Average investment securities increased $1.4 billion, or 38%, from the
year-ago nine-month period primarily reflecting the investment of a portion of
the proceeds from the automobile loan sales.
Average total core deposits in the first nine months of 2004 were $16.1
billion, up $0.7 billion, or 4%, from the comparable year-ago period. This
growth primarily reflected a $1.0 billion, or 16%, increase in interest bearing
demand deposits, primarily money market accounts, partially offset by a $0.4
billion, or 13%, decline in retail CDs.
Table 6 reflects average balance sheets and rates earned and paid on
interest-earning assets and interest-bearing liabilities, respectively, for the
first nine-month periods of 2004 and 2003:
30
Table 6 - Condensed
Consolidated YTD Average Balance Sheets and Net Interest Margin
Analysis
31
Provision for Credit Losses
The provision for credit losses is the expense necessary to maintain the
ALLL and the allowance for unfunded loan commitments (AULC) at levels adequate
to absorb Management’s estimate of inherent losses in the total loan and direct
financing lease portfolio, unfunded loan commitments, and letters of credit.
Taken into consideration are such factors as current period net charge-offs
that are charged against these allowances, current period loan and lease growth
and any related estimate of likely losses associated with that growth based on
historical experience, the current economic outlook, and the anticipated impact
on credit quality of existing loans and leases, unfunded commitments and
letters of credit (see Allowances for Credit Losses for additional discussion
and Table 14).
The provision for credit losses in the 2004 third quarter was $11.8
million, a $39.8 million reduction from the year-ago quarter and a $6.8 million
increase from the 2004 second quarter. The reduction from the year-ago quarter
reflected overall improved portfolio quality performance, as well as an
improved economic outlook, only partially offset by provision expense related
to loan growth. The increase in provision for credit losses from the 2004
second quarter reflected the fact that the 2004 second quarter provision
benefited from a $9.7 million recovery on a single C&I credit that had been
charged-off in the 2002 fourth quarter. Underlying credit quality trends
between the 2004 second and third quarter continued to improve. As previously
disclosed, effective January 1, 2004, the company adopted a more quantitative
approach to calculating the economic reserve component of the ALLL, making this
component more responsive to changes in economic conditions. This change,
combined with the existing quantitative approach for determining the
transaction reserve component, as well as changes to the specific reserve
component, will result in more volatility in the total ALLL and corresponding
provision for credit losses (see Credit Risk for additional discussion).
The provision for credit losses in the first nine months of 2004 was $42.4
million, a $95.2 million, or 69%, decline from the comparable year-ago period.
This reduction reflected the same factors impacting third quarter
year-over-year performance.
32
Non-Interest Income
Table 7 reflects non-interest income detail for each of the past five
Table 7 — Non-Interest Income
N.M. — Not Meaningful.
2004 Third Quarter versus 2003 Third Quarter
Non-interest income decreased $82.9 million, or 30%, from the year-ago
quarter. Comparisons with prior-period results are heavily influenced by the
decline in operating leases and related operating lease income. These trends
are expected to continue as all automobile leases originated since April 2002
are direct financing leases with income reflected in net interest income, not
non-interest income. Reflecting the run-off of the operating lease portfolio,
operating lease income declined $53.2 million, or 45%, from the 2003 third
quarter. Excluding operating lease income, non-interest income decreased $29.7
million, or 19%, from the year-ago quarter with the primary drivers being:
33
and options. As none of these instruments qualify for hedge accounting,
the change in value of the trading account assets are reported as a
component of other income, whereas the gains (losses) from the sale of
securities that are available for sale are reported as investment
securities gains (losses).
Partially offset by:
2004 Third Quarter versus 2004 Second Quarter
Compared with the 2004 second quarter, non-interest income declined $28.2
million, or 13%. This comparison is also heavily influenced by the decline in
operating lease income for the reasons noted above. Reflecting the run-off of
the operating lease portfolio, operating lease income declined $14.3 million,
or 18%, from the 2004 second quarter. Excluding operating lease income,
non-interest income decreased $13.9 million, or 10%, from the 2004 second
quarter with the primary drivers being:
Partially offset by:
2004 First Nine Months versus 2003 First Nine Months
Non-interest income for the first nine months of 2004 declined $187.0
million, or 23%, from the comparable year-ago period. Comparisons with
prior-period results are heavily influenced by the decline in operating leases
and related operating lease income (see above discussion). Reflecting the
run-off of the operating lease portfolio, operating lease income for the first
nine months of 2004 declined $152.4 million, or 40%, from the comparable
year-ago period. Excluding operating lease income, non-interest income for the
first nine months of 2004 decreased $34.6 million, or 8%, from the comparable
year-ago period with the primary drivers being:
34
Partially offset by:
35
Non-Interest Expense
Table 8 reflects non-interest expense detail for each of the last five
Table 8 - Non-Interest Expense
2004 Third Quarter versus 2003 Third Quarter
Non-interest expense decreased $26.8 million, or 9%, from the year-ago
quarter. Comparisons with prior-period results are influenced by the decline
in operating lease expense as the operating lease portfolio continues to
run-off (see above operating lease income discussion). Excluding operating
lease expense, non-interest expense increased $11.5 million, or 6%, from the
year-ago quarter with the primary drivers being:
Partially offset by:
36
The current quarter included $1.8 million of current quarter expenses
related to Unizan integration planning and systems conversion. These expenses
were spread across various non-interest expense categories with no meaningful
impact on any single line item.
2004 Third Quarter versus 2004 Second Quarter
Compared with the 2004 second quarter, non-interest expense declined $8.7
million, or 3%. Comparisons with prior-period results are also heavily
influenced by the decline in operating lease expense. Operating lease expense
declined $7.7 million, or 12%, from the 2004 second quarter. Excluding
operating lease expense, non-interest expense decreased $1.1 million from the
second quarter with the primary drivers being:
Partially offset by:
2004 First Nine Months versus 2003 First Nine Months
Non-interest expense for the first nine months of 2004 declined $71.5
million, or 8%, from the comparable year-ago period. Comparisons with
prior-period results are influenced by the decline in operating lease expense
as the operating lease portfolio continues to run-off (see above operating
lease income discussion). Operating lease expense declined $119.5 million, or
39%, from the 2003 nine-month period.
Excluding operating lease expense, non-interest expense for the first nine
months of 2004 increased $48.0 million, or 8%, from the year-ago period with
the primary drivers being:
37
Operating Lease Assets
Table 9 reflects operating lease assets performance detail for each of the
Table 9 - Operating Lease
Performance
(1) As a percent of average operating lease assets, quarterly amounts annualized.
38
Operating lease assets represent automobile leases originated before May
2002. This operating lease portfolio will run-off over time since all
automobile lease originations after April 2002 have been recorded as direct
financing leases and are reported in the automobile loan and lease category in
earning assets. As a result, the non-interest income and non-interest expenses
associated with the operating lease portfolio will also decline over time.
2004 Third Quarter versus 2003 Third Quarter and 2004 Second Quarter
Average operating lease assets in the 2004 third quarter were $0.8
billion, down $0.8 billion, or 49%, from the year-ago quarter and 18% from the
2004 second quarter.
Operating lease income, which totaled $64.4 million in the 2004 third
quarter, represented 34% of non-interest income in the quarter. Operating lease
income was down $53.2 million, or 45%, from the year-ago quarter and $14.3
million, or 18%, from the 2004 second quarter, reflecting the declines in
average operating leases. As no new operating leases have been originated
after April 2002, the operating lease asset balances will continue to decline
through both depreciation and lease terminations. Net rental income was down
45% and 17%, respectively, from the year-ago and 2004 second quarter. Fees
declined 45% from the year-ago quarter and 39% from the second quarter
reflecting the recognition of deferred fees resulting from higher than expected
prepayments of operating lease assets in the second quarter of this year.
Recoveries from early terminations declined 55% from the year-ago quarter and
20% from the second quarter.
Operating lease expense totaled $54.9 million, down $38.2 million, or 41%,
from the year-ago quarter and down $7.7 million, or 12%, from the 2004 second
quarter. These declines also reflected the fact that this portfolio is
decreasing over time as no new operating leases are being originated. The
decline in operating lease expense from the year-ago quarter was partially
offset by a $3.5 million increase in additional depreciation expense for the
estimated decline in residual values.
Losses on operating lease assets consist of residual losses at termination
and losses on early terminations. Residual losses arise if the ultimate value
or sales proceeds from the automobile are less than Black Book value, which
represents the insured amount under the company’s residual value insurance
policies. This situation may occur due to excess wear-and-tear or excess
mileage not collected from the lessee. Losses on early terminations occur when
a lessee, due to credit or other reasons, turns in the automobile before the
end of the lease term. A loss is realized if the automobile is sold for a
value less than the net book value at the date of turn-in. Such losses are not
covered by the residual value insurance policies. To the extent the company is
successful in collecting any deficiency from the lessee, amounts received are
recorded as recoveries from early terminations.
Credit losses on operating lease assets are included in operating lease
expense and were $5.0 million in the current quarter, down from $10.0 million
in the year-ago quarter and $5.2 million in the second quarter. Recoveries on
operating lease assets are included in operating lease income and totaled $1.2
million, $2.6 million, and $1.5 million, for the same periods, respectively.
The ratio of operating lease asset credit losses to average operating lease
assets, net of recoveries, was an annualized 1.89% in the current quarter,
1.90% in the year-ago quarter, and 1.51% in the 2004 second quarter. As noted
in the non-interest income discussion above, the operating lease portfolio will
decline over time as no new operating lease assets have been generated since
April 2002.
On a quarterly basis, Management evaluates the amount of residual value
losses that it anticipates will result from the estimated fair value of a
leased vehicle being less than the residual value inherent in the lease. Fair
value includes estimated net proceeds from the sale of the leased vehicle plus
expected residual value insurance proceeds and amounts expected to be collected
from the lessee for excess mileage and other items that are billable under
terms of the lease contract. When estimating the amount of expected insurance
proceeds, Management takes into consideration policy caps that exist in two of
the three residual value insurance policies and whether it expects aggregate
claims under such policies to exceed these caps. Residual value losses
exceeding any insurance policy cap are reflected in higher depreciation expense
over the remaining life of the affected automobile lease. Also as part of its
quarterly analysis, Management evaluates automobile leases individually for
impairment.
Residual value losses on automobile leases booked prior to October 1,
2000, were covered by an insurance policy with a $120 million cap. During the
third quarter, residual value losses exceeded this cap a few months earlier
than anticipated due to higher than anticipated volume of turned in automobiles
and to a lesser degree, softness in the used car market. Total losses above
the cap are expected to be $18-$30 million, including $10 million already
recognized and reflected in additional accumulated depreciation. As a result,
the company anticipates that 2004 fourth quarter operating lease depreciation
will be $2-$3 million higher than the 2004 third quarter expense level, with
lesser amounts in quarters thereafter.
39
The residual value insurance policy covering automobile leases originated
between October 1, 2000 and April 30, 2002 contains a $50 million cap. At this
time, the company anticipates that total claims against this policy will be
$10-$18 million, well below the cap. To date, approximately $3 million of
claims have been filed on this policy. All automobile leases originated since
April 30, 2002, are covered under a policy that does not place a cap on losses.
This policy will cover leases originated through April 30, 2005.
2004 First Nine Months versus 2003 First Nine Months
Average operating lease assets in the first nine-months of 2004 were $1.0
billion, down $0.8 billion, or 46%, from the comparable year-ago period.
Operating lease income, which totaled $232.0 million in the first nine
months of 2004, represented 36% of non-interest income, and was down $152.4
million, or 40%, from the comparable year-ago period. Net rental income was
down $144.2 million, or 40%. Fees declined $5.1 million, or 31%, from the same
year-ago period. Recoveries from early terminations declined $3.1 million, or
41% from the year-ago period. Operating lease expense totaled $188.2 million,
down $119.5 million, or 39%, from the comparable year-ago period. The declines
in operating lease income and operating lease expense reflected the fact that
this portfolio is decreasing over time as no new operating leases are being
originated, and the same factors discussed above.
The ratio of operating lease asset credit losses to average operating
lease assets, net of recoveries, was an annualized 1.71% in the first nine
months of 2004, down from 1.94% in the comparable year-ago period.
Provision for Income Taxes
The provision for income taxes in the third quarter of 2004 was $38.3
million and represented an effective tax rate on income before taxes of 29.0%.
The provision for income taxes increased $1.0 million from the year-ago
quarter, due to a higher effective tax rate. The effective tax rates in the
second quarter of 2004 and the third quarter 2003 were 28.3% and 26.3%,
respectively. The higher effective tax rate in the 2004 third quarter
reflected a reduction in estimated 2004 tax benefits (credits) from a reduced
level of investments in partnerships and the recording of non-deductible
expenses.
For the first nine months of 2004, provision for income taxes was $116.5
million and represented an effective tax rate on income before taxes of 27.5%.
This represented an increase of $12.0 million from the same period in 2003, in
which the effective tax rate was 26.3%, reflecting higher pre-tax income.
Each quarter, taxes for the full year are estimated and year-to-date tax
accrual adjustments are made. Revisions to the full year estimate of accrued
taxes occur periodically due to changes in the tax rates, audit resolution with
taxing authorities, and newly enacted statutory, judicial, and regulatory
guidance. These changes, when they occur, affect accrued taxes and can result
in fluctuations in the quarterly effective tax rate.
In accordance with FAS 109,
Accounting for Income Taxes
, no deferred
income taxes are to be recorded when a company intends to permanently reinvest
their earnings from a foreign activity. As of September 30, 2004, the company
intended to permanently reinvest the earnings from its foreign asset
securitization activities of approximately $83.7 million.
Management expects the 2004 effective tax rate to remain below 30% as the
level of tax-exempt income, general business credits, and asset securitization
activities remain consistent with prior years.
40
CREDIT RISK
Credit risk is the risk of loss due to adverse changes in a borrower’s
ability to meet its financial obligations under agreed upon terms. The company
is subject to credit risk in lending, trading, and investment activities. The
nature and degree of credit risk is a function of the types of transactions,
the structure of those transactions, and the parties involved. The majority of
the company’s credit risk is associated with lending activities, as the
acceptance and management of credit risk is central to profitable lending.
Credit risk represents a limited portion of the total risks associated with the
investment portfolio and is incidental to trading activities. Credit risk is
mitigated through a combination of credit policies and processes and portfolio
diversification. These include origination/underwriting criteria, portfolio
monitoring processes, and effective problem asset management. There are very
specific and differing methodologies for managing credit risk for commercial
credits compared with consumer credits (see Credit Risk Management section of
the Company’s 2003 Form 10-K for a complete discussion).
Loan and Lease Composition
Table 10 reflects period-end loan and lease portfolio mix by type of loan
Table 10 - Loans and
Lease Portfolio Composition
During 2004, the composition of the loan and lease portfolio changed such
that lower credit risk home equity loans and residential mortgages each
represented 17% of total credit exposure at September 30, 2004, up from 15% and
11%, respectively, a year earlier. Conversely, C&I loans have declined from
24% a year ago to 23% at September 30, 2004, reflecting, in part, strategies to
exit large, individual commercial credits, including out-of-footprint shared
national credits.
41
At the beginning of the 2004 second quarter, the criteria for categorizing
commercial loans as either C&I loans or CRE loans was clarified. The new
criteria are based on the purpose of the loan. Previously, the categorization
was based on the nature of the collateral securing, or partially securing, the
loan. Under this new methodology, as new loans are originated or existing
loans renewed, loans secured by owner-occupied real estate are categorized as
C&I loans (previously CRE loans) and unsecured loans for the purpose of
developing real estate are categorized as CRE loans (previously C&I loans).
As a result of this change, $282 million in C&I loans were reclassified to CRE
loans effective June 30, 2004. Prior periods were not reclassified. This
change had no impact on the underlying credit quality of total commercial
loans. However, it did increase average reported CRE loans in the 2004 third
quarter by $282 million, with an equal decrease in average reported C&I loans.
The company also has a portfolio of automobile operating lease assets.
Although these assets are reflected on the balance sheet, they are not part of
total loans and leases or earning assets. In addition, prior to June 30, 2004,
there was a small pool of securitized automobile loans, which represented
off-balance sheet securitized automobile loan assets. Both of these asset
classes represent automobile financing credit exposure, despite not being
components of total loans and leases. As such, operating lease assets and
securitized loans are added to the on-balance sheet automobile loans and leases
to determine a total automobile financing exposure, which Management finds
helpful in evaluating the overall credit risk for the company.
During the third quarter of 2004, $153 million of automobile loans were
sold, resulting in a third quarter pre-tax gain on the sale of automobile loans
of $0.3 million. This sale increased the total automobile loans sold since the
beginning of 2003 to $3.7 billion. These sales represented a continuation of a
strategy to reduce exposure to automobile financing to approximately 20% of
total credit exposure (see Table 10). At September 30, 2004, this exposure was
$4.9 billion, down from $6.2 billion at year-end, and represented 21% of total
credit exposure, down from 22% at the end of the last quarter and from 30% a
year earlier.
Net Loan and Lease Charge-offs
Table 11 reflects net loan and lease charge-off detail for each of the last
Table 11 - Net Loan and Lease Charge-offs
Net Charge-offs by Loan and Lease Type
Net Charge-offs - Annualized Percentages
42
Table 11 - Net Loan and
Lease Charge-offs Continued
Net Charge-offs by Loan and Lease Type
Net Charge-offs - Annualized Percentages
2004 Third Quarter versus 2003 Third Quarter and 2004 Second Quarter
Total net charge-offs for the 2004 third quarter were $16.5 million, or an
annualized 0.30% of average total loans and leases. This was a reduction from
$32.8 million, or 0.64%, in the year-ago quarter. However, it was an increase
from $12.5 million in the second quarter, or an annualized 0.23% of average
total loans and leases, as net charge-offs in the second quarter were reduced
by a $9.7 million one-time recovery of a previously charged-off commercial
loan. This recovery lowered total commercial (C&I and CRE) net charge-offs by
39 basis points and total loan and lease net charge-offs by 18 basis points.
Excluding the impact of this recovery, 2004 second quarter total net
charge-offs would have been $22.2 million, or an annualized 0.41% of average
total loans and leases. Gross charge-offs in the third quarter declined $4.5
million, or 15%, from the second quarter.
Total commercial net charge-offs in the third quarter were $2.6 million,
or an annualized 0.10%, down from $15.8 million, or an annualized 0.68%, in the
year-ago quarter and up from only $137 thousand in the previous quarter.
Adjusting for the $9.7 million recovery noted above (39 basis point impact),
second quarter total commercial net charge-offs would have been $9.8 million,
or an annualized 0.40% of related loans.
Total consumer net charge-offs in the current quarter were $13.9 million,
or an annualized 0.45% of related loans. This compared with $16.9 million, or
0.61%, in the year-ago quarter and $12.4 million, or an annualized 0.41% of
related loans in the 2004 second quarter.
Total automobile loan and lease net charge-offs in the 2004 third quarter
were $7.6 million, or an annualized 0.74% of average automobile loans and
leases. This compared with $12.2 million of net charge-offs, or an annualized
0.94%, in the year-ago quarter and $7.8 million, or an annualized 0.69% in the
second quarter.
43
2004 First Nine Months versus 2003 First Nine Months
Total net charge-offs for the first nine months of 2004 were $57.6
million, or an annualized 0.35% of average total loans and leases. This was a
46% reduction from $106.7 million, or 0.73%, in the comparable year-ago period.
Performance for the first nine months of 2004 was consistent with the
company’s net charge-off target of 0.35%-0.45% for a stable economic
environment.
Total commercial (C&I and CRE) net charge-offs in the first nine months of
2004 were only $10.3 million, or an annualized 0.14%, down from $58.4 million,
or 0.83%, in the comparable year-ago period. The decline from the year-ago
period reflected improved credit quality, including lower non-performing assets
(NPAs), as well as the benefit of a $9.7 million C&I recovery in the 2004 first
nine-month period.
Total consumer net charge-offs in the first nine months of 2004 were $47.3
million, or an annualized 0.52% of related loans. This compared with $48.2
million, or 0.63%, in the comparable year-ago period. Total automobile loan
and lease net charge-offs in the first nine months of 2004 were $31.9 million,
or an annualized 0.94% of average automobile loans and leases, down slightly
from $32.7 million, or an annualized 0.97% of average automobile loans and
leases in the year-ago nine-month period.
Non-performing Assets and Past Due Loans and Leases
Table 12 reflects period-end NPAs and past due loans and leases detail for
Table 12 - Non-Performing Assets and Past Due Loans and Leases
44
NPAs were $80.5 million at September 30, 2004, down $56.6 million, or 41%,
from the prior year, and up $5.8 million, or 8%, from June 30, 2004. NPAs as a
percent of total loans and leases and other real estate were 0.36% at September
30, 2004, down from 0.65% a year-ago, but up slightly from 0.34% at June 30,
2004. At September 30, 2004, the company adopted a new policy of placing home
equity loans and lines on non-accrual status when they exceed 180 days past
due. Such loans were previously classified as accruing loans and leases past
due 90 days or more. This policy change conforms the home equity loans and
lines classification to that of other consumer loans secured by residential
real estate. As a result of this change in policy, the current quarter
included $7.7 million of non-performing home equity loans and lines secured by
real estate. NPAs at September 30, 2004, included $30.2 million of lower-risk
residential real estate-related assets, which represented 38% of total NPAs.
This compared with $19.1 million, or 14%, at the end of the year-ago quarter.
The over 90-day delinquent, but still accruing, ratio was 0.24% at
September 30, 2004, down from 0.31% a year ago, and unchanged from 0.24% at
June 30, 2004.
Table 13 reflects NPA activity. The $22.7 million of new NPAs in the 2004
third quarter included the addition of the $7.7 million of non-performing home
equity loans and lines due to the policy change noted above. Excluding the
Non-performing Assets Activity
Table 13 — Non-Performing Asset Activity
45
Allowances for Credit Losses (ACL) and Provision for Credit Losses
The company maintains two reserves, both of which are available to absorb
possible credit losses: the allowance for loan and lease losses (ALLL) and the
allowance for unfunded loan commitments (AULC). When summed together, these
reserves constitute the total allowances for credit losses (ACL). Table 14
Table 14 — Allowances for Credit Losses
(1)
The third quarter 2003 includes the allowance for loan losses associated with automobile loans from a securitizations trust that was consolidated as a result of the adoption of FASB Interpretation
No. 46 on July 1, 2003.
The September 30, 2004, ALLL was $282.7 million, down from $336.4 million
a year ago and from $286.9 million at June 30, 2004. These declines reflected
continued credit quality improvement, the change in the mix of the loan
portfolio to lower-risk residential mortgages and home equity loans, and
improvement in the economic outlook. Expressed as a percent of period-end
loans and leases, the ALLL at September 30, 2004, was 1.25%, down from 1.59% a
year-ago and from 1.32% at June 30, 2004. The ALLL as a percent of NPAs was
351% at September 30, 2004, up from 245% a year ago, but down from 384% at June
30, 2004.
The September 30, 2004, AULC was $30.0 million, down slightly from $33.7
million at the end of the year-ago quarter, and from $31.2 million at June 30,
2004.
On a combined basis, the ACL as a percent of total loans and leases was
1.38% at September 30, 2004, compared with 1.75% a year ago and 1.46% at the
end of last quarter. The ACL as a percent of NPAs was 389% at September 30,
2004, compared with 270% a year earlier and 426% at June 30, 2004.
The provision for credit losses in the 2004 third quarter was $11.8
million, a $39.8 million reduction from the year-ago quarter, but a $6.8
million increase from the 2004 second quarter. The reduction in provision
expense from the year-ago quarter reflected overall improved portfolio quality
performance and a stronger economic outlook, only partially offset by provision
expense related to loan growth. The increase in provision expense from the
second quarter primarily reflected lower recoveries, as the second quarter
included a $9.7 million commercial loan recovery. As previously disclosed,
46
effective January 1, 2004, the company adopted a more quantitative approach to
calculating the economic reserve component of the
ALLL making this component more responsive to changes in economic
conditions (see discussion below). This change, combined with the quantitative
approach for determining the transaction reserve component, as well as changes
to the specific reserve component, may result in more volatility in the total
ALLL, and corresponding provision for loan and lease losses.
The ALLL consists of three components, the transaction reserve, the
economic reserve, and specific reserves (see the Credit Risk discussion in
company’s 2003 Form 10-K for additional discussion).
Transaction
reserve – This ALLL component is based on historical portfolio
performance information. Specifically, the probability-of-default and the
loss-in-event-of-default are assigned an expected risk factor based on the
type and structure of each credit. Reserve factors are then calculated and
applied at an individual loan level for all products.
Specific
reserves – This ALLL component represents the sum of
credit-by-credit reserve decisions for individual C&I and CRE loans when
it is determined that the related expected risk factor is insufficient to
cover the estimated losses embedded in the specified credit facility.
Economic
reserve – This ALLL component reflects anticipated losses
impacted by changes in the economic environment. As previously reported,
effective January 1, 2004, the company adopted a significantly more
quantitative approach to the calculation of the economic reserve
component. In order to quantify the economic reserve, the company
identified four statistically significant indicators of loss volatility
over the seven-year period from 1996 through 2003. The four variables as
identified by the regression model are: (1) the US Index of Leading
Economic Indicators, (2) the US Corporate Profits Index, (3) the US
Unemployment Index, and (4) the University of Michigan Current Consumer
Confidence Index.
This methodology permits the decomposition of the total ALLL ratio into
these three components and provides increased insight into the rationale for
increases or decreases in the overall ALLL ratio. As shown in Table 14, the
ALLL ratio at September 30, 2004 was 1.25%, of which 0.84% represented the
transaction reserve, 0.33% the economic reserve, and 0.08% specific reserves.
Of the 7 basis point decline in the ALLL ratio from 1.32% at June 30, 2004, the
transaction and specific reserves each accounted for 2 basis points of the
decline. This reflected the combination of the shift in the loan and lease
portfolio mix toward higher credit quality loans, as well as the release of
specific reserves due to the improvement in the credit quality and/or the
resolution of individual C&I and CRE credit situations. The remaining 3 basis
points of decline in the ALLL ratio represented lower relative economic
reserves, reflecting an improved economic outlook. This more quantitative
methodology for determining the ALLL will be more responsive to changes in the
portfolio mix, the economic environment, and individual credit situations, with
the result being an ALLL ratio that exhibits greater quarterly fluctuations.
MARKET RISK
Market risk is the potential for losses in the fair value of the company’s
assets and liabilities due to changes in interest rates, exchange rates, and
equity prices. The company incurs market risk in the normal course of business.
Market risk arises when the company extends fixed-rate loans, purchases
fixed-rate securities, originates fixed-rate certificates of deposit (CDs),
obtains funding through fixed-rate borrowings, and leases automobiles and
equipment based on expected lease residual values. Market risk arising from
changes in interest rates, which affects the market values of fixed-rate assets
and liabilities, is interest rate risk. Market risk arising from the
possibility that the uninsured residual value of leased assets will be
different at the end of the lease term than was estimated at the lease’s
inception is residual value risk. From time to time, the company also has small
exposures to trading risk and foreign exchange risk. At September 30, 2004, the
company had $120.3 million of trading assets, primarily in its broker/dealer
businesses.
Interest Rate Risk
Interest rate risk is the primary market risk incurred by the company. It
results from timing differences in the repricing and maturity of assets and
liabilities and changes in relationships between market interest rates and the
yields on assets and rates on liabilities, including the impact of embedded
options.
Management seeks to minimize the impact of changing interest rates on the
company’s net interest income and the fair value of assets and liabilities. The
board of directors establishes broad policies regarding interest rate and
market risk
47
and liquidity risk. The asset and liability committee (ALCO) establishes
specific operating limits within the parameters of the board of directors’
policies. ALCO regularly monitors position concentrations and the level of
interest rate sensitivity to ensure compliance with board of directors approved
risk tolerances (see Interest Rate Risk discussion in the company’s 2003 Form
10-K for a complete discussion).
Interest rate risk modeling is performed monthly. Two broad approaches to
modeling interest rate risk are employed: income simulation and economic value
analysis. An income simulation analysis is used to measure the sensitivity of
forecasted net interest income to changes in market rates over a one-year
horizon. The economic value analysis (Economic Value of Equity or EVE) is
calculated by subjecting the period-end balance sheet to changes in interest
rates and measuring the impact of the changes in the value of the assets and
liabilities.
The simulations for evaluating short-term interest rate risk exposure are
scenarios that model gradual 100 and 200 basis point increasing and decreasing
parallel shifts in interest rates over the next twelve-month period beyond the
interest rate change implied by the current yield curve. The table below shows
the results of the scenarios as of September 30, 2004, and June 30, 2004. All
Net Interest Income at Risk (%)
The primary simulations for EVE risk assume an immediate and parallel
increase in rates of +/- 100 and +/- 200 basis points beyond any interest rate
change implied by the current yield curve. The table below outlines the results
Economic Value of Equity at Risk (%)
LIQUIDITY RISK
The objective of effective liquidity management is to ensure that cash
flow needs can be met on a timely basis at a reasonable cost under both normal
operating conditions and unforeseen or unpredictable circumstances. The
liquidity of the Bank is available to originate loans and leases and to repay
deposit and other liabilities as they become due or are demanded by customers.
Liquidity risk arises from the possibility that funds may not be available to
satisfy current or future commitments based on external macro market issues,
investor perception of financial strength, and events unrelated to the company
such as war, terrorism, or financial institution market specific issues (see
Liquidity discussion in the company’s 2003 Form 10-K for a complete
discussion).
The primary source of funding is core deposits from retail and commercial
customers (see Table 15). As of September 30, 2004, core deposits totaled
$16.7 billion, and represented 83% of total deposits. This compared with $15.6
billion, or 83% of total deposits, a year earlier. Most of the growth in core
deposits was attributable to growth in interest bearing and non-interest
bearing demand deposits as retail CDs declined.
48
Table 15 - Deposit Liabilities
Liquidity policies and limits are established by the board of directors,
with operating limits set by ALCO. Two primary liquidity measures are the
ratio of loans and operating lease assets to deposits and the percentage of
assets funded with non-core, or wholesale, liabilities. The limits set by the
board for these two liquidity measures are 135% and 40%, respectively. At
September 30, 2004, the actual ratio of loans and operating leases to deposits
was 116%, while the percentage of assets funded with non-core or wholesale
liabilities was 35%. In addition, guidelines are established by ALCO to ensure
diversification of wholesale funding by type, source, and maturity and provide
sufficient balance sheet liquidity to cover 100% of wholesale funds maturing
within a six-month time period. A contingency funding plan is in place, which
includes forecasted sources and uses of funds under various scenarios in order
to prepare for unexpected liquidity shortages, including the implications of
any rating agency changes. ALCO meets monthly to identify and monitor
liquidity issues, provide policy guidance, and oversee adherence to, and the
maintenance of, an evolving contingency funding plan.
Credit ratings by the three major credit rating agencies are an important
component of the company’s liquidity profile. Among other factors, the credit
ratings are based on the financial strength, credit quality and concentrations
in the loan portfolio, the level and volatility of earnings, capital adequacy,
the quality of management, the liquidity of the balance sheet, the availability
of a significant base of core retail and commercial deposits, and the company’s
ability to access a broad array of wholesale funding sources. Adverse changes
in these factors could result in a negative change in credit ratings and impact
not only the ability to raise funds in the capital markets, but also the cost
of these funds. In addition, certain financial on- and off-balance sheet
arrangements contain credit rating triggers that could increase funding needs
if a negative rating change occurs. Letter of credit commitments for
marketable securities, interest rate swap collateral agreements, and certain
asset securitization transactions contain credit rating provisions.
49
As of September 30, 2004, credit ratings are as follows:
Management believes that sufficient liquidity exists to meet the funding
needs of the Bank and the parent company.
OFF-BALANCE SHEET ARRANGEMENTS
Like other financial organizations, Huntington has various commitments in
the ordinary course of business that, under GAAP, are not recorded in the
financial statements. Specifically, Huntington makes various commitments to
extend credit to customers, to sell loans, and to maintain obligations under
operating-type non-cancelable leases for its facilities. Derivatives and other
off-balance sheet arrangements are discussed under the “Market Risk” section of
the company’s 2003 Form 10-K.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. These guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. There were $989
million of outstanding standby letters of credit at September 30, 2004.
Non-interest income was recognized from the issuance of these standby letters
of credit of $8.5 million for the nine-month period ended September 30, 2004.
The carrying amount of deferred revenue related to standby letters of credit at
September 30, 2004, was $3.9 million. Standby letters of credit are included in
the determination of the amount of risk-based capital that the company and the
Bank are required to hold.
CAPITAL
Capital is managed both at the parent and the Bank levels. Capital levels
are maintained based on regulatory capital requirements and the economic
capital required to support credit, market, and operation risks inherent in the
company’s business and to provide the flexibility needed for future growth and
new business opportunities. Management places significant emphasis on the
maintenance of a strong capital position, which promotes investor confidence,
provides access to the national markets under favorable terms, and enhances
business growth and acquisition opportunities. The importance of managing
capital is also recognized, and Management continually strives to maintain an
appropriate balance between capital adequacy and providing attractive returns
to shareholders.
Shareholders’ equity totaled $2.5 billion at September 30, 2004. This
balance represented a $186 million increase from December 31, 2003. The growth
in shareholders’ equity resulted from the retention of net income after
dividends to shareholders of $181 million and stock option exercises of $18
million. This growth was offset by a decrease in accumulated other
comprehensive income of $16 million. The decrease in accumulated other
comprehensive income primarily resulted from a decline in the market value of
securities available for sale, partially offset by an increase in the market
value of cash flow hedges at September 30, 2004, compared with December 31,
2003.
On September 4, 2001, options totaling 3.2 million shares of common stock
were granted to, with certain specified exceptions, full- and part-time
employees under the Huntington Bancshares Incorporated Employee Stock Incentive
Plan
50
(the “Incentive Plan”). Under the terms of the Incentive Plan, these
options were to vest on the earlier of September 4, 2006, or at such time as
the closing price for Huntington’s common stock for five consecutive trading
days reached or exceeded $25.00. Huntington’s common stock closing price
exceeded $25.00 for each of the five consecutive trading days beginning October
1, 2004, and ending October 7, 2004. As a result, options for 2.0 million
shares of common stock granted under the Incentive Plan, net of options for 1.2
million shares cancelled due to employee attrition, became fully vested and
exercisable after the close of trading on October 7, 2004.
At September 30, 2004, the company had unused authority to repurchase up
to 7.5 million shares, though no shares were repurchased during the 2004 third
quarter. This authorization may be used to help mitigate the dilutive earnings
impact resulting from the issuance of these Incentive Plan shares. All
purchases under the current authorization will be made from time-to-time in the
open market or through privately negotiated transactions depending on market
conditions.
On October 13, 2004, the board of directors declared a quarterly cash
dividend on its common stock of $0.20 per common share. The dividend is
Table 16 - Quarterly Common Stock Summary
Average equity to average assets in the 2004 third quarter was 7.66%, up
from 7.49% a year earlier, and up from 7.42% for the second quarter of 2004
(see Table 17). At September 30, 2004, the tangible equity to assets ratio was
7.11%, up from 6.77% a year ago, and from 6.95% at June 30, 2004. The increase
from June 30, 2004, primarily reflected growth in retained earnings.
51
Table 17 - Capital Adequacy
At September 30, 2004, the tangible equity to risk-weighted assets ratio
was 7.80%, up significantly from 7.24% in the year-ago quarter, and up from
7.64% at June 30, 2004. The increase in the tangible equity to risk-weighted
assets ratio reflected primarily the positive impact resulting from reducing
the overall risk profile of earning assets throughout this period, most notably
a less risky loan portfolio mix, as well as growth in low risk investment
securities.
The Federal Reserve Board, which supervises and regulates the company,
sets minimum capital requirements for each of these regulatory capital ratios.
In the calculation of these risk-based capital ratios, risk weightings are
assigned to certain asset and off-balance sheet items such as interest rate
swaps, loan commitments, and securitizations. Huntington’s Tier 1 Risk-based
Capital, Total Risk-based Capital, Tier 1 Leverage ratios, and risk-adjusted
assets for the recent five quarters are well in excess of minimum levels
established for “well capitalized” institutions of 6.00%, 10.00%, and 5.00%,
respectively. At September 30, 2004, the company had regulatory capital ratios
in excess of “well capitalized” regulatory minimums.
The Bank is primarily supervised and regulated by the Office of the
Comptroller of the Currency, which establishes regulatory capital guidelines
for banks similar to those established for bank holding companies by the
Federal Reserve Board. At September 30, 2004, the Bank had regulatory capital
ratios in excess of “well capitalized” regulatory minimums.
LINES OF BUSINESS DISCUSSION
Huntington has three distinct lines of business: Regional Banking, Dealer
Sales, and the Private Financial Group (PFG). A fourth segment includes the
company’s Treasury functions and capital markets activities and other
unallocated assets, liabilities, revenue, and expense. Lines of business
results are determined based upon the company’s management reporting system,
which assigns balance sheet and income statement items to each of the business
segments. The process is designed around Huntington’s organizational and
management structure and, accordingly, the results below are not necessarily
comparable with similar information published by other financial institutions.
A description of each segment and discussion of financial results is provided
below.
Management uses earnings on an operating basis, rather than on a GAAP
basis, to measure underlying performance trends for each business segment.
Analyzing earnings on an operating basis is very helpful in assessing
underlying performance trends, a critical factor used by Management to
determine the success of strategies and future earnings capabilities.
Operating earnings represent GAAP earnings adjusted to exclude the impact of
the significant items discussed in Note 8 to the Condensed Consolidated
Financial Statements.
Regional Banking
Regional Banking provides products and services to retail, business
banking, and commercial customers. These products and services are offered in
seven operating regions within the five states of Ohio, Michigan, West
Virginia, Indiana, and Kentucky through the company’s traditional banking
network. Each region is further divided into Retail and Commercial Banking
units. Retail products and services include home equity loans and lines of
credit, first mortgage loans, direct installment loans, business loans,
personal and business deposit products, as well as sales of investment and
insurance services. Retail products and services comprise 59% and 80% of total
Regional Banking loans and deposits, respectively. These products and services
are delivered to customers through banking offices, ATMs, Direct Bank—
Huntington’s customer service center, and Web Bank at huntington.com.
Commercial banking serves middle-market and commercial banking relationships,
which use a variety of banking products and services including commercial
loans, international trade,
52
cash management, leasing, interest rate protection
products, capital market alternatives, 401(k) plans, and mezzanine investment
capabilities.
2004 Third Quarter versus 2003 Third Quarter
Regional banking contributed $59.1 million of the company’s net operating
earnings in the third quarter of 2004, up $4.0 million, or 7%, from the third
quarter of 2003. This increase was due primarily to a $27.5 million reduction
in provision for credit losses, which was partially offset by $21.3 million
decline in mortgage banking income. Total fully taxable equivalent revenues
declined $18.4 million, or 7%, from the third quarter of 2003 due to lower
mortgage banking income. Total expenses increased $3.0 million, or 2%, from
the year-ago quarter. The ROA was 1.39% in the current quarter, down from
1.45% in the year-ago quarter, though the ROE of 22.4% in the current quarter
increased from 21.2% in the year-ago quarter.
Compared with the year-ago quarter, 2004 third quarter net interest income
increased $2.2 million, or 1%, reflecting an 18% increase in average total
loans and 5% increase in average total deposits, partially offset by a 43 basis
point decline in net interest margin to 4.10% from 4.53%.
Average total loans increased $2.4 billion, or 18%, primarily reflecting a
$1.7 billion increase in average residential mortgages, a $0.5 billion, or 15%,
increase in home equity loans and lines of credit, as well as a $0.5 billion,
or 12%, increase in average CRE loans. The growth in home equity, residential
mortgages, and CRE loans reflected the continued favorable impact of low
interest rates on demand for real estate-related financing. Total average C&I
loans declined $0.2 billion, or 6%, from the year-ago quarter, due in part to
weak demand, as well as the impact from continued strategies to lower exposure
to large individual commercial credits, and to a lesser degree, a decline in
shared national credits. Small Business C&I and CRE loans (included in total
average C&I and CRE loans) increased $0.2 billion, or 11%, due to specific
strategies that focus on this business segment.
Average total deposits increased $0.8 billion, or 5%. This reflected
strong growth in average interest bearing demand deposits, up $0.9 billion, or
15%, which was partially offset by a $0.1 billion, or 4%, decline in domestic
time deposits. Of the $0.8 billion increase in average total deposits,
Commercial Banking accounted for $0.6 billion and Small Business $0.3 billion,
which was partially offset by a $0.1 billion decline in average total deposits
in Mortgage Banking.
The company continued its focus on customer service and delivery channel
optimization. From the year-ago quarter, six banking offices were opened while
three were closed. The number of Retail Banking demand deposit account (DDA)
households increased 2% from the end of the year-ago quarter. Progress was
made in improving the Retail Banking 90-day cross sell ratio, from 2.0 products
or services to 2.3, a 15% improvement. Further, the online banking penetration
of retail households with on-line banking increased to 36% from 29% a year
earlier, with a 31% increase in the number of online customers.
The 43 basis points, or an effective 9%, decline in the net interest
margin to 4.10% from 4.53% reflected a combination of factors. This included a
shift in the loan portfolio mix to lower-margin, but higher credit quality,
consumer residential real estate-related loans. In addition, interest rates
offered on deposits have been near historical lows throughout this period, and
despite rising recently, they remain below levels of a year ago such that it
remained difficult to make commensurate reductions in deposit rates compared
with reductions in loan yields compared with a year earlier.
The provision for credit losses for the third quarter of 2004 was $5.1
million or $27.5 million less than in the year-ago quarter. This decline
reflected the overall improvement in credit quality including lower NPAs, as
well as the shift to lower-rate, lower-risk residential mortgages and home
equity loans and lines. Net charge-offs were $7.2 million, or an annualized
0.18% of average loans and leases, down from $19.8 million, or an annualized
0.59%, in the year-ago quarter (see Credit Risk for additional discussion
regarding charge-offs and allowance for loan loss reserve methodologies).
Non-interest income decreased $20.5 million, or 21%, from the year-ago
quarter, primarily due to the $21.3 million lower mortgage banking income,
partially offset by higher deposit service charges and equipment operating
lease income. Mortgage banking income decreased $21.3 million, or 71%, from
the year-ago quarter largely reflecting a change in reporting methodology. In
2004, MSR impairment and recovery is reflected in the Treasury/Other segment,
whereas in the year-ago quarter a $17.8 million recovery of previously recorded
MSR temporary impairment was recognized in Regional Banking. The remainder of
the decline in mortgage banking income is attributable to lower production and
lower gain on loan sales. The
increase in equipment operating lease income reflected growth in operating
leases, a relatively new business line. Deposit service charges increased $1.8
million, or 4%, reflecting an increase in demand deposit accounts and
53
higher
personal NSF and overdraft fees. The $1.4 million, or 11%, decline in other
income reflected lower fee sharing revenue from internal partners.
Non-interest expense increased $3.0 million, or 2%, from the year-ago
quarter, reflecting a $5.9 million, or 10%, increase in personnel costs due to
higher salaries and benefit expenses, and to a lesser degree an increase in the
number of employees. The $3.4 million, or 4%, decrease in other expenses
reflected lower marketing, telecommunications, outside services, and
transportation expenses, partially offset by higher occupancy.
2004 Third Quarter versus 2004 Second Quarter
Regional Banking earnings in the 2004 third quarter decreased $1.7
million, or 3%, from the 2004 second quarter. This reflected a $9.0 million
increase in the provision or credit losses, an $8.1 million increase in
net-interest income, and a $3.6 million decline in non-interest expense,
partially offset by a $5.2 million decline in non-interest income. The ROA
and ROE in the 2004 third quarter were 1.39% and 22.4%, respectively, down from
1.52% and 23.9% in the 2004 second quarter.
Net interest income increased $8.1 million, or 5%, from the prior quarter,
reflecting 6% growth in average total loans and 2% in average total deposits,
partially offset by a decline in the net interest margin to 4.10% from 4.15%.
Average total loans increased $0.8 billion, or 6%. Consumer loans
increased $0.7 billion, or 11%, reflecting strong growth in residential
mortgages and home equity loans and lines of credit. Excluding the impact of
the $282 million of C&I loans reclassified as CRE loans on June 30, 2004,
average C&I loans increased at a 15% annualized rate during the quarter, with
average CRE loans decreasing at a 5% annualized rate. Total average deposits
increased $0.4 billion, or 2%, reflecting growth in interest bearing and
non-interest bearing demand deposits, up 3% and 2%, respectively, and a 3%
increase in domestic time deposits.
From the end of the 2004 second quarter, the number of DDA households
increased an annualized 6%, and the 90-day cross sell ratio increased to 2.34
products from 2.17 products. On-line banking penetration of retail households
increased to 36%, and the number of active online users increased 7%.
The $9.0 million increase in provision for credit losses from the second
quarter was primarily due to a $9.7 million recovery on a single C&I credit in
the second quarter. Net charge offs were $7.2 million, or an annualized 0.18%
of average loans and leases in the current quarter. This was up from $1.8
million, or 0.05%, in the second quarter, as the second quarter net charge-offs
were reduced by the $9.7 million C&I recovery.
Non-interest expense declined $3.6 million, or 2%, from the second quarter
of 2004
.
This reflected a $7.9 million decline in other expense as the second
quarter included $5.8 million of costs related to investments in partnerships
generating tax benefits for the first half of 2004. Personnel costs increased
$4.1 million impacted by severance costs related to the 2% decline in full-time
equivalent employees and lower deferred salary costs associated with lower loan
production.
2004 First Nine Months versus 2003 First Nine Months
Regional banking contributed $167.9 million of the company’s net operating
earnings in the first nine months of 2004, up $52.7 million from the comparable
year-ago period. This increase reflected the benefits of a $93.4 million
reduction in provision for credit losses, and an $11.5 million increase in net
interest income, partially offset by a $14.5 million increase in non-interest
expense and a $9.4 million decline in non-interest income. The ROA and ROE
for first nine months of 2004 were 1.40% and 21.9%, respectively, up from 1.06%
and 15.2%, respectively, in the year-ago period.
Net interest income in the first nine months of 2004 increased $11.5
million, or 3%, reflecting a 14% increase in average total loans and leases and
a 5% increase in average total deposits, partially offset by a 32 basis point
decline in net interest margin to 4.16% from 4.48%.
Average total loans increased $1.8 billion, or 14%, primarily reflecting a
$1.3 billion, or 83%, increase in average residential mortgages, a $0.5
billion, or 15%, increase in home equity loans and lines of credit, as well as
a $0.4 billion, or 12%, increase in average CRE loans. Total average C&I loans
declined $0.3 million, or 7%, from the year-ago nine-month period. The growth
in home equity, residential mortgages, and CRE loans, as well as the decline in
C&I loans reflected the
same factors noted above in the year-ago quarter comparison. Small
Business C&I and CRE loans (included in total average C&I and CRE loans)
increased $0.2 billion, or 11%, due to specific strategies that focus on this
business segment.
54
Average total deposits increased $0.7 billion, or 5%. This reflected
strong growth in average interest bearing demand deposits, up $0.9 billion, or
17%, partially offset by a $0.4 billion, or 10%, decline in domestic time
deposits. Of the $0.7 billion increase in average total deposits, Corporate
Banking accounted for $0.6 billion and Small Business $0.3 billion, with this
benefit partially offset by a $0.2 billion decline in average total Retail
Banking deposits.
The 32 basis points, or an effective 7%, decline in the net interest
margin to 4.16% from 4.48% reflected the same factors discussed above in the
2004 third quarter versus 2003 third quarter performance.
Provision for credit losses for the first nine months of 2004 was $3.2
million, down $93.4 million from the year-ago period reflecting the overall
improvement in credit quality, as well as the shift to lower risk residential
mortgages and home equity loans and lines. Net charge-offs for the first nine
months were $20.6 million, or an annualized 0.19% of average loans and leases,
down from $71.7 million, or 0.73%, in the comparable year-ago period. The first
nine months of 2004 net charge-offs were reduced by a $9.7 million C&I recovery
in the second quarter on a single credit that had been charged-off in the
fourth quarter of 2002 (see Credit Risk for additional discussion regarding
charge-offs and allowance for loan loss reserve methodologies).
Non-interest income for the first nine months of 2004 decreased $9.4
million, or 4%, from the comparable year-ago period, reflecting a combination
of factors including declines in mortgage banking revenue and other income,
partially offset by increases in service charges on deposit accounts, and
higher other income.
Non-interest expense for the first nine months of 2004 increased $14.5
million, or 3%, from the year-ago period. This reflected an $11.6 million, or
6%, increase in personnel expenses for the same reasons noted above in the
prior year quarter comparison. The $2.0 million, or 1%, increase in other
expenses reflected higher occupancy, depreciation, and charge card processing
expenses.
55
Table 18 - Regional Banking
N.M. — Not Meaningful.
Table
18 Regional Banking
(1)
(1) Operating basis, see page 52 for definition.
Table
18 Regional Banking
(1)
(1) Operating basis, see page 52 for definition.
Dealer Sales
Dealer Sales serves over 3,500 automotive dealerships within Huntington’s
primary banking markets as well as in Arizona, Florida, Georgia, Pennsylvania,
and Tennessee. The segment finances the purchase of automobiles by consumers of
the automotive dealerships, purchases automobiles from dealers and
simultaneously leases the automobiles under long-term direct financing leases
to consumers, finances dealership floor plan inventories, real estate, or
working capital needs, and provides other banking services to the automotive
dealerships and their owners.
The accounting for automobile leases significantly impacts the
presentation of Dealer Sales’ financial results. Residual values on leased
automobiles, including the accounting for residual value losses, is also an
important factor in the overall profitability of automobile leases (see
Operating Lease Performance for additional discussion). Automobile leases
originated prior to May 2002 are accounted for as operating leases, with leases
originated since April 2002 accounted for as direct financing leases. For
automobile leases originated prior to May 2002, the related financial results
are reported as operating lease income and operating lease expense, components
of non-interest income and non-interest expense, respectively, whereas the cost
of funding these leases is included in interest expense. Credit losses
associated with these leases are also reflected in operating lease expense.
With no new operating leases being originated, this portfolio, and related
operating lease income and operating lease expense, will decrease over time and
eventually become immaterial. In contrast, all new leases since April 2002 are
originated as direct financing leases, where the income and funding are
included in net interest income. As a result of the treatment of operating
leases, the net interest margin increased during the three and nine-month
periods ended September 30, 2004 compared with the same periods in 2003 as the
declining operating lease portfolio resulted in less assessed interest expense.
Direct financing lease credit losses are charged against an allowance for
credit losses with provision for credit losses recorded to maintain an
appropriate allowance level.
2004 Third Quarter versus 2003 Third Quarter
Dealer Sales contributed $17.3 million of the company’s net operating
earnings in the third quarter of 2004, up $1.9 million, or 12%, from the 2003
third quarter. This increase was primarily due to a lower provision for credit
losses, partially offset by lower net income from loan and lease assets (net
interest income plus operating lease income less operating lease expense). The
ROA and ROE for the third quarter of 2004 were 1.14% and 17.8%, respectively,
up from 0.79% and 14.0%, respectively, in the 2003 third quarter.
Net interest income was $37.1 million, up $7.9 million, or 27%, from the
year-ago quarter. This increase reflected a 94 basis point increase in the net
interest margin to 2.90% from 1.96% a year ago, offset in part by a $949
million, or 16%, decrease in average total loans and leases. The decrease in
average total loans and leases, and the net interest margin was driven by rapid
growth in direct financing leases as average automobile loans declined due to
loan sales. The net interest margin was favorably impacted by $12.0 million,
or 68 basis points, by the run-off of operating lease assets and the fact that
all of the funding cost associated with these assets is reflected in interest
expense, whereas the income is reflected in non-interest income. In contrast,
the net interest margin was negatively impacted by growth in lower yielding
direct financing lease balances.
Average automobile direct financing leases increased $660 million, or 42%,
reflecting the fact that this is still a maturing portfolio with relatively
fewer maturities and pay-offs than a fully matured portfolio. Direct financing
lease originations totaled $268 million in the third quarter of 2004, down 13%
from $309 million in the 2003 third quarter. The growth in average direct
financing lease balances contrasts with the $774 million, or 50%, decline in
average operating lease assets, which consists of leases originated prior to
May 2002 with balances running off through maturities and pay-offs.
Average automobile loans declined $1.7 billion, or 48%, compared with the
same year-ago period, reflecting sales of automobile loans over the last twelve
months as the company executes its strategy to reduce exposure to automobile
financing to 20% of total credit exposure. Automobile loan originations
declined $378 million, or 51%, to $362 million in the 2004 third quarter
compared with $739 million in the 2003 third quarter, reflecting a highly
competitive marketplace led by manufacturer captive finance companies, and
Management’s decision to maintain high quality originations.
Also contributing to the change in average total loans and leases was an
18% increase in C&I loans, primarily dealer floor plan loans.
The provision for credit losses decreased $9.9 million, or 62%, from the
year-ago quarter, partially reflecting a $4.5 million, or 37%, decline in
charge-offs. The annualized net charge-off ratio for automobile loans was 1.11%
in the third quarter of 2004, down from 1.19% in the 2003 third quarter while the
annualized net charge-off ratio for direct
59
financing leases was 0.43%, up from 0.36% in the year-ago quarter. The
charge-off ratio for direct finance leases is expected to trend higher as this
portfolio fully matures. The provision for credit losses also benefited from
lower origination levels, as well as the higher credit quality nature of the
originations in the 2004 third quarter compared to the year-ago period.
Non-interest income decreased $52.7 million, or 42%, driven by a $53.8
million, or 46%, decline in operating lease income as that portfolio continued
to run-off. Other non-interest income increased $1.2 million, or 18%, primarily
due to an increase in loan servicing income. Non-interest expense declined
$37.9 million, or 33%, primarily reflecting a $38.7 million, or 42%, decline in
operating lease expense. Other non-interest expense increased $0.5 million
primarily due to higher lease residual value losses while personnel costs
increased $0.3 million, or 6%, primarily due to less benefit from deferring
loan origination costs, reflecting the decline in loan and lease production.
See Operating Lease Assets discussion for more details.
2004 Third Quarter versus 2004 Second Quarter
Dealer Sales operating earnings in the third quarter of 2004 were down
$3.7 million, or 18%
,
from the second quarter of 2004. The primary contributor
to this decrease was lower net income from loan and lease assets (net interest
income plus operating lease income less operating lease expense). The ROA and
ROE in the 2004 third quarter were 1.14% and 17.8%, respectively, down from
1.27% and 20.5%, respectively, in the 2004 second quarter.
Net interest income was $37.1 million for third quarter of 2004, down $0.7
million, or 2%, from the previous quarter. This decrease reflected an 8%
decline in average total loans and leases, partially offset by a 13 basis point
increase in the net interest margin to 2.90% from 2.77%.
Average automobile loans decreased $479 million, or 21%, primarily as a
result of loan sales at the end of the second quarter and throughout the third
quarter of 2004. Also contributing to the decline was a 16% decrease in
automobile loan originations in the third quarter of 2004 compared with the
second quarter.
Average automobile direct financing leases increased $111 million, or 5%,
reflecting the fact that this continues to be a maturing portfolio. Direct
financing lease originations increased 9% compared with the second quarter of
2004. The growth in average direct financing lease balances contrasts with the
$182 million, or 19%, decline in average operating lease assets.
During the third quarter of 2004, C&I loans, including dealer floor plan
loans, decreased $87 million, or 11%, from the prior quarter, consistent with
seasonal patterns for usage of available credit lines.
The provision for credit losses decreased $2.1 million, or 26%, primarily
reflecting lower growth in loans and direct financing leases, as well as
improved credit quality. Charge-offs in the 2004 third quarter remained
unchanged at $7.8 million compared to the second quarter of 2004, though as an
annualized percent of average total loans and leases net charge-offs increased
to 0.63% from 0.58% in the second quarter due to the 8% decline in average
loans and leases.
Non-interest income declined $15.8 million, or 18%, primarily due to a
$14.6 million, or 19%, decline in operating lease income as that portfolio
continued to run-off. Non-interest expense declined $8.6 million, or 10%,
primarily reflecting a $7.9 million, or 13%, decline in operating lease
expense, as well as the fact that the second quarter included a loss accrual
associated with pending litigation.
2004 First Nine Months versus 2003 First Nine Months
Dealer Sales contributed $50.3 million of the company’s net operating
earnings for the first nine months of 2004, up from $48.9 million for the same
period a year ago. The earnings increase reflected higher net income from loan
and lease assets (net interest income plus operating lease income less
operating lease expense). The ROA and ROE for the first nine months of 2004
were 1.01% and 16.2%, respectively, up from 0.89% and 14.9%, respectively, for
the 2003 nine-month period.
Net interest income was $109.8 million, up $36.9 million, or 51%, from the
year-ago period. This significant increase reflected a $211 million, or 4%,
increase in average total loans and leases, as well as an 84 basis point
increase in the net interest margin to 2.67% from 1.83% a year ago. The
increase in average total loans and leases was driven by rapid growth in direct
financing leases as average automobile loans declined due to loan sales.
60
Average automobile direct financing leases increased $822 million, or 63%,
reflecting the fact that this is still a maturing portfolio with fewer
maturities and pay-offs than a fully matured portfolio. Direct financing lease
originations totaled $790 million in the first nine months of 2004, down 22%
from $1.0 billion in the first nine months of 2003. The growth in average
direct financing lease balances contrasted with an $836 million, or 46%,
decline in average operating lease asset, which consists of all leases
originated prior to May 2002 with balances running off through maturities and
pay-offs.
Average automobile loans declined $758 million compared with the same
period a year ago, reflecting the impact of loan sales, as well as an $814
million, or 39%, decline in originations. The decline in originations reflectd
the highly competitive marketplace lead by manufacturer captive finance
companies, and a decision by Management to maintain high quality loan
originations. The impact of the loan sales and lower production levels was
offset in part by the consolidation in July 2003 of $1.0 billion of previously
securitized loans related to the adoption of FIN 46.
Also contributing to the growth in average total loans and leases was a
$118 million, or 18%, increase in C&I loans, primarily dealer floor plan loans.
The net interest margin continued to be favorably impacted by the run-off
of the operating lease assets and the fact that all of the funding cost
associated with these assets is reflected in interest expense, whereas the
income is reflected in non-interest income. In contrast, the net interest
margin was negatively impacted by growth in lower yielding direct financing
lease balances, loan sales, and a lower net interest margin associated with
securitized loans that were recorded on the balance sheet as a result of the
adoption of FIN 46.
The provision for credit losses decreased slightly from a year-ago,
primarily reflecting a $0.9 million, or 3%, decline in net charge-offs. Net
charge-offs for the first nine months of 2004 included a $4.7 million one-time
charge in the first quarter to correct for the classification of claims
received under policies purchased to protect the company from loss in the event
repossessed vehicles had physical damage. Net charge-offs as an annualized
percent of average total loans and leases decreased to 0.80% for the first nine
months of 2004, down from 0.85% for the comparable year-ago period.
Non-interest income decreased $155.7 million, or 38%, driven by a $153.4
million, or 40%, decline in operating lease income as that portfolio continued
to run-off. Brokerage and insurance income declined $1.5 million, or 47%,
reflecting lower auto-related insurance income, with other non-interest income
down $1.3 million, or 5%, primarily due to declines in securitization income
that resulted from the adoption of FIN 46 in the third quarter of 2003.
Non-interest expense declined $120.4 million, or 32%, primarily reflecting a
$120.3 million, or 39%, decline in operating lease expense. Other non-interest
expense declined $1.8 million, or 4%, primarily due to lower residual value
insurance costs. In contrast, personnel costs increased $1.8 million, or 12%,
primarily due to higher benefit costs and less benefit from deferring loan
origination costs, reflecting the decline in loan and lease production.
61
Table 19 - Dealer Sales
(1)
(1) Operating basis, see page 52 for definition.
(2) Calculated assuming a 35% tax rate.
N.M. - Not Meaningful.
Table 19 - Dealer Sales
(1)
(1) Operating basis, see page 52 for definition.
N.M. - Not Meaningful.
eop - End of Period.
Table 19 - Dealer Sales
(1)
(1) Operating basis, see page 52 for definition.
eop - End of Period.
Private Financial Group
The Private Financial Group (PFG) provides products and services designed
to meet the needs of the company’s higher net worth customers. Revenue is
derived through trust, asset management, investment advisory, brokerage,
insurance, and private banking products and services. As of September 30,
2004, the trust division provides fiduciary services to more than 11,000
accounts with assets totaling $41.2 billion, including $9.1 billion managed by
PFG. In addition, PFG has over $560 million in assets managed by Haberer
Registered Investment Advisor, which provides investment management services to
nearly 400 customers.
PFG provides investment management and custodial services to the company’s
29 proprietary mutual funds, including ten variable annuity funds, which
represented more than $3 billion in total assets under management at September
30, 2004. The Huntington Investment Company offers brokerage and investment
advisory services to both Regional Banking and PFG customers through more than
100 licensed investment sales representatives and nearly 700 licensed personal
bankers. This customer base has over $4 billion in mutual fund and annuity
assets. PFG’s insurance entities provide a complete array of insurance
products including individual life insurance products ranging from basic term
life insurance to estate planning, group life and health insurance, property
and casualty insurance, mortgage title insurance, and reinsurance for payment
protection products. Income and related expenses from the sale of brokerage
and insurance products is shared with the line of business that generated the
sale or provided the customer referral, most notably Regional Banking.
2004 Third Quarter versus 2003 Third Quarter
The Private Financial Group (PFG) contributed $7.9 million of the
company’s net operating earnings in the third quarter of 2004, up $2.4 million,
or 45%, from the third quarter of 2003. The increase reflected the benefits of
lower provision for credit losses, higher non-interest income, and higher
net-interest income, partially offset by an increase in non-interest expense.
The ROA and ROE for the 2004 third quarter were 2.01% and 26.8%, respectively,
up from 1.59% and 19.9%, respectively, in the 2003 third quarter.
Net interest income increased $0.6 million, or 6%, from the year-ago
quarter as average loan balances increased $1.4 billion, or 16%, while average
deposit balances were unchanged. Average total loans increased $189 million,
or 16%, from the year-ago quarter reflecting 17% growth in consumer loans, 13%
in C&I loans and 15% growth in Commercial CRE loans. Consumer loan growth
occurred in personal credit lines and residential real estate loans, largely
due to the favorable mortgage rate environment. C&I and CRE loan growth
reflected initiatives to add relationship managers in several markets targeted
for growth opportunities, most notably East and West Michigan and Central and
Southern Ohio. Deposit balances remained flat as new account growth was offset
by some large account runoff in East Michigan and Northeast Ohio due to rate
competition. The net interest margin declined 28 basis points from the
year-ago quarter to 3.16%, reflecting growth in lower-margin loans combined
with shrinking margins on personal credit lines as customer rate adjustments
typically lag behind prime rate increases by 30 to 60 days.
The provision for credit losses decreased $2.4 million from the year-ago
quarter, reflecting a reduction in non-performing assets and a $0.5 million
recovery of a prior period charge-off. The annualized total net charge-off
ratio decreased to 0.18% in the third quarter 2004 from 0.24% in the year-ago
quarter. Credit quality remained strong with total non-performing assets
representing only 0.36% of total loans outstanding for the current quarter, a
decline from 0.48% in the year-ago quarter.
Non-interest income, net of fees shared with other business units,
increased $1.8 million, or 7%, from the year-ago quarter mainly due to growth
in trust services income. Trust services income increased $1.6 million, or
11%, mainly due to revenue growth in personal trust and investment management
business. Total trust assets grew 17% to $41.2 billion at September 30, 2004,
up from $35.2 billion at September 30, 2003. For the same periods, managed
assets grew to $9.6 billion from $8.6 billion, or 12%. This growth resulted
mainly from new business development, reflecting the success of the new
business delivery model utilizing the brokerage sales force to sell asset
management services. Brokerage and insurance revenue increased $0.2 million,
or 2%, as increased annuity revenue was largely offset by a decrease in title
insurance and life agency revenue. The increased annuity revenue was mainly
due to a shift in product sales mix from lower rate fixed annuities to higher
rate variable and indexed annuities. The decrease in title insurance reflects
the slowdown in mortgage refinancing activity from the 2003 third quarter while
the decrease in life agency revenue resulted from the fact that several
unusually large premium cases were sold in the year ago quarter.
65
Non-interest expense increased $1.0 million, or 4%, from the 2003 third
quarter primarily due to higher personnel costs reflecting an increase in the
brokerage sales force to support the new sales distribution model, an increase
in private banking relationship managers to support the expansion of the
private banking presence in selected markets, higher trust and investment
management sales commissions from increased new business development, and
higher benefit costs. Increased personnel costs were partially offset by a
reduction in allocated corporate overhead and product support expenses and
reduced mutual fund clearing costs as a result of decreased trading activity
and contract pricing renegotiation with the outside clearing agent.
2004 Third Quarter versus 2004 Second Quarter
PFG’s net contribution to the company’s operating earnings in the third
quarter of 2004 was up $1.6 million, or 26%, from the second quarter. The
increase primarily reflected the benefit of a $1.5 million decline in
non-interest expense, a $0.6 million decline in the provision for credit losses
and a $0.5 million increase in net interest income, partially offset by a $0.1
million decline in non-interest income. The ROA and ROE in 2004 were 2.01% and
26.8%, respectively, up from 1.67% and 21.3%, respectively in the previous
quarter.
Net interest income increased $0.5 million, or 5%, from the previous
quarter. Average loan balances increased 4%, while average deposit balances
decreased 1%. Average total loans and leases increased 4% from the 2004 second
quarter, with consumer, C&I and CRE, all increasing. The decline in deposit
balances reflected some large account balance runoff in East Michigan and
Northeast Ohio due to rate competition. In addition, there appears to have
been deposit disintermediation to other investment alternatives as customers
begin to use temporary cash accumulation to slowly move back into the
investment market. The net interest margin increased slightly to 3.16% from
3.14% in the second quarter mainly due to the fact that customer deposit rates
have essentially remained unchanged, whereas rates on loans have begun to
increase.
The provision for credit losses decreased $0.6 million from the prior
quarter. The decrease was due to a reduction in non-performing assets combined
with the fact that in the current quarter there was a large $0.5 million
recovery of a prior period charge-off. The annualized total net charge-off
ratio decreased to 0.18% from 0.27% in the previous quarter. Credit quality
remained strong with total non-performing assets representing only 0.36% of
period-end total loans outstanding for the current quarter, down from 0.43% at
the end of the second quarter.
Non-interest income, net of fees shared with other business units,
declined slightly from the second quarter as modest increases in trust services
income and brokerage and insurance income were offset by a reduction in
inter-company other income. Trust services income increased $0.3 million, or
2%, from the previous quarter due to an increase in revenue from the Huntington
Funds, reflecting a combination of asset growth and a reduction in money market
fund fee waivers as yields improved. Total trust assets increased $2 billion,
or 5%, during the third quarter and managed assets increased $0.3 billion, or
3%, mainly in Huntington Funds. Much of the total asset growth resulted from a
new $1.5 billion institutional custody account in September. Although gross
brokerage and insurance revenue declined $0.7 million, or 6%, mainly due to
historical seasonality and continuing market trepidation, net brokerage and
insurance revenue after fee sharing increased $0.2 million, or 2%, as
proportionately more revenue was generated through the PFG brokerage and
insurance specialists compared with retail banking offices.
Non-interest expense decreased $1.5 million, or 5%, from the prior quarter
reflecting a decline in personnel costs due to lower commission expense as a
result of the reduction in gross brokerage and insurance revenue combined with
a change in the brokerage sales commission plan. In addition, the lower other
expenses reflected a reduction in allocated corporate overhead and product
support expenses, reduced mutual fund clearing costs as a result of decreased
trading activity and contract pricing renegotiation with the outside clearing
agent, and reduced travel and business development expenses.
2004 First Nine Months versus 2003 First Nine Months
PFG contributed $21.2 million of the company’s net operating earnings for
the first nine months of 2004, up $2.5 million, or 13%, from the first nine
months of 2003. The increase reflected the benefit of a $3.7 million decline in
the provision for credit losses, a $3.6 million increase in net interest
income, and a $3.0 million increase in non-interest income, partially offset by
a $6.5 million increase in non-interest expense. The ROA and ROE for the first
nine months of 2004 were 1.87% and 24.2%, respectively, compared with 1.92% and
24.3%, respectively, in the comparable year-ago period.
66
Net interest income for the first nine months of 2004 increased $3.6
million, or 12%, from the comparable 2003 period as a result of 18% growth in
average loan balances and 8% growth in average deposits. Average consumer
loans increased 24%, with average C&I and CRE loans increasing 7% and 11%,
respectively. This loan growth reflected the favorable mortgage loan
environment, and to a lesser degree, the benefit of initiatives to add
relationship managers in 2004 in several markets targeted for growth
opportunities, most notably East and West Michigan and Central and Southern
Ohio. The deposit growth occurred mainly in consumer and commercial money
market accounts aided by promotional rate offerings and a redirection of sweep
account balances from money market mutual fund accounts. The net interest
margin for the first nine months of 2004 was 3.18%, down from 3.33% for the
comparable 2003 period due to the fact that much of the loan growth was
attributable to growth in lower yielding consumer loans.
The provision for credit losses declined $3.7 million in the current
nine-month period compared with the prior year period, due largely to the fact
that most of the significant current period charge-offs resulted in an
offsetting release of previously established reserves. Net charge-offs
expressed as an annualized percent of average total loans and leases was 0.17%
for the first nine months of 2004, down from 0.20% in the same year-ago period.
Credit quality remained strong as total NPAs represented only 0.36% of total
loans at September 30, 2004, down from 0.48% a year earlier.
Non-interest income, net of fees shared with other business units,
increased $3.0 million, or 4%, from the first nine months of 2003 mostly due to
higher trust services income. Trust services income increased $4.2 million, or
9%, mainly due to revenue growth in personal trust and investment management
business for the reasons discussed in the prior-year quarterly discussion
above. Brokerage and insurance revenue was essentially unchanged from the
prior year nine-month period as increased brokerage revenue was offset by lower
insurance income. Brokerage revenue increased $2.0 million, or 7%, due mainly
to increased mutual fund revenue and equity trade commissions. The increased
mutual fund revenue reflected increased trading activity in early 2004 as the
market was continuing its resurgence and IRA investments were strong. The
increased equity trade commissions resulted from the fact that trading activity
on certain investment management accounts are now being processed through the
brokerage sales force. Insurance income decreased $3.2 million, or 28%, as a
result of correcting the accounting for certain insurance products sold with
automobile loans and leases. Beginning in 2004, these fees are now deferred
and recognized over the life of the related automobile loan or lease. In
addition, credit life insurance revenue declined as policy refunds and
cancellations have exceeded new premiums written. Mortgage banking income
decreased by $1.1 million due to increased mortgage portfolio servicing costs
resulting from the growth in residential real estate mortgage loans and due to
a change in fee sharing methodology that resulted in reduced income shared by
Huntington Mortgage Group.
Non-interest expense increased $6.5 million, or 8%, in the first nine
months of 2004 from the comparable year-ago period primarily reflecting a $5.7
million, or 13%, increase in personnel costs reflecting an increase in the
brokerage sales force and private banking relationship managers (see earlier
discussion), and higher benefit costs. Allocated expense for corporate
overhead and product support costs increased $0.7 million, or 2%.
67
Table 20 - Private Financial Group
(1)
(1) Operating basis, see page 52 for definition.
(2) Calculated assuming a 35% tax rate.
N.M. - Not Meaningful.
Table 20 - Private Financial Group
(1)
(1) Operating basis, see page 52 for definition.
N.M. - Not Meaningful.
eop - End of Period.
Table 20 - Private Financial Group
(1)
N.M. - Not Meaningful.
eop - End of Period.
Treasury / Other
The Treasury/Other segment includes revenue and expense related to assets,
liabilities, and equity that are not directly assigned or allocated to one of
the other three business segments. Assets included in this segment include
investment securities, bank owned life insurance, and mezzanine loans
originated through Huntington Capital Markets.
Net interest income includes the net impact of administering Huntington’s
investment securities portfolios as part of overall liquidity management. A
match-funded transfer pricing system is used to attribute appropriate funding
interest income and interest expense to other business segments. As such, net
interest income includes the net impact of any over or under allocations
arising from centralized management of interest rate risk. Furthermore, net
interest income includes the net impact of derivatives used to hedge interest
rate sensitivity as well as net interest income related to Huntington Capital
Markets loan activity.
Non-interest income includes fee income related to Huntington Capital
Markets activities and miscellaneous non-interest income not allocated to other
business segments, including bank owned life insurance income. Fee income also
includes MSR temporary impairment valuation recoveries or impairments, as well
as any investment securities and/or trading assets gains or losses, which are
used to mitigate MSR valuation changes. Prior to 2004, changes in MSR
temporary impairment valuations were reflected in the Regional Banking business
segment, whereas investment securities and/or trading assets gains or loss were
reflected in the Treasury/Other segment. Since investment securities and/or
trading account gains or losses are used to mitigate MSR valuation changes, and
since this risk is managed centrally, for 2004 reporting both MSR valuation
changes, as well as investment securities and/or trading assets gains or
losses, are reflected in Treasury/Other results.
Non-interest expense includes expenses associated with Huntington Capital
Markets activities, as well as certain corporate administrative and other
miscellaneous expenses not allocated to other business segments.
The provision for income taxes for each of the other business segments is
calculated at a statutory 35% tax rate though the company’s overall effective
tax rate is lower. As a result, the provision for income taxes in
Treasury/Other includes the difference between the actual effective tax rate
and the statutory tax rate used to allocate income taxes to the other segments.
2004 Third Quarter versus 2003 Third Quarter
Treasury/Other net income decreased $11.5 million, or 58%, from the
year-ago quarter. This reflected a combination of higher non-interest expense
and lower net interest income, partially offset by higher non-interest income.
Net interest income decreased $4.0 million, or 21%, from the year-ago
quarter. Driving this variance were a $10.7 million increase in wholesale
funding costs, offset by a $6.5 million increase in interest income on
securities.
The provision for credit losses declined $0.1 million from the year-ago
quarter, attributable to decreased Huntington Capital Markets lending activity.
Non-interest income was $1.4 million higher than in the year-ago quarter,
reflecting the impact of using investment securities gains and trading losses,
reflected in other income, to offset valuation changes in MSR. In 2004, MSR
temporary impairment and recovery is reflected in the Treasury/Other segment,
whereas in the year-ago quarter MSR temporary impairment recovery of $17.8
million was recognized in Regional Banking. Other non-interest income was also
down $3.0 million from the year-ago quarter reflecting lower income from
trading activities and bank owned life insurance.
Non-interest expense for operational, administrative, and support groups,
which was not specifically allocated to the other business segments increased
$8.3 million from a year ago reflecting costs associated with the SEC formal
investigation, as well as higher personnel and benefits costs.
The provision for income taxes decreased $0.6 million, reflecting the
benefit of the company’s lower overall effective tax rate versus the 35%
effective tax rate used to allocate provision for income taxes to each line of
business, partially offset by a higher overall effective tax rate in the 2004
third quarter, compared with the year-ago quarter.
71
2004 Third Quarter versus 2004 Second Quarter
Treasury/Other’s net income in the 2004 third quarter was $10.7 million,
or 57%, lower than the second quarter. This reflected a combination factors
including higher non-interest expense, lower net interest income, and lower
non-interest income, partially offset by lower provision for income taxes.
Net interest income declined $3.5 million, or 19%, reflecting a $6.5
million decline in earnings from Huntington’s transfer pricing system as these
earnings were allocated to the other business segments. This negative impact
was partially offset by a $2.6 million increase in earnings on investment
securities, where average balances were 19% higher than in the comparable
year-ago period.
Non-interest income declined $2.6 million from the 2004 second quarter
primarily reflecting a $2.5 million decrease in investment banking activity
revenues from Huntington Capital Markets.
Non-interest expense increased $6.1 million, or 31%, from the second
quarter, reflecting SEC-related costs in the third quarter.
The provision for credit losses increased $0.5 million, reflecting an
increase in the provision not allocated to the other business segments.
The provision for income taxes decreased $1.9 million, reflecting the
benefit of the company’s lower overall effective tax rate versus the 35%
effective tax rate used to allocate provision for income taxes to each line of
business.
2004 First Nine Months versus 2003 First Nine Months
Treasury/Other net income for the first nine months of 2004 declined $23.2
million, or 28%, from the comparable year-ago period. This reflected a
combination of factors consisting of higher non-interest expense, lower net
interest income, higher provision for credit losses, and lower non-interest
income, partially offset by lower provision for income taxes.
Net interest income for the first nine months of 2004 decreased $4.4
million, or 7%, from the comparable year-ago period. Driving this variance was
a $18.0 million increase in wholesale funding costs and a $14.3 million decline
in revenue from derivatives activities, and a $27.6 million increase in
interest income on securities.
The provision for credit losses for the first nine months of 2004 was $2.4
million higher than a year earlier, attributable to increased Huntington
Capital Markets lending activity.
Non-interest income was $2.3 million, or 5%, lower than in the year-ago
nine-month period, reflecting the impact of MSR temporary valuations changes
on mortgage banking income, trading losses, and a decline in bank owned life
insurance income, partially offset by the impact of investment securities
gains used in conjunction with the trading losses to offset MSR impairment
valuation changes.
Non-interest expense for operational, administrative, and support groups,
not specifically allocated to the other business segments was up $22.8 million
from last year including higher non-allocated personnel and benefits costs,
expenses related to the SEC investigation, partially offset by lower other
expenses allocated to other business segments.
The provision for income taxes declined $8.7 million, reflecting the
benefit of the company’s lower overall effective tax rate versus the 35%
effective tax rate used to allocate provision for income taxes to each line of
business, partially offset by the company’s higher total effective tax rate in
the first nine months of 2004 versus the comparable year-ago period.
72
Table 21 - Treasury/Other
(1)
N.M. - Not
Meaningful.
Table 21 - Treasury/Other
(1)
(1) Operating basis, see page 52 for definition.
N.M. - Not Meaningful.
eop - End of Period.
Table 22 — Total Company
(1)
(1) Operating
basis, see page 52
for definition.
(2)
Calculated assuming
a 35% tax rate.
N.M. — Not
Meaningful.
Table 22 - Total Company
(1)
(1) Operating
basis, see page 52
for definition.
N.M. — Not
Meaningful.
eop -
End of Period.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures for the current period are found
beginning on page 47 of this report, which includes changes in market risk
exposures from disclosures presented in Huntington’s Form 10-K.
Item 4. Controls and Procedures
Huntington’s management, with the participation of its Chief Executive Officer
and the Chief Financial Officer,
evaluated the effectiveness of Huntington’s disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of the end of the period covered by this report. Based upon such
evaluation, Huntington’s Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of such period, Huntington’s disclosure
controls and procedures are effective.
There have not been any changes in Huntington’s internal control over
financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter
to which this report relates that have materially affected, or are reasonably
likely to materially affect, Huntington’s internal control over financial
reporting.
77
PART II. OTHER INFORMATION
In accordance with the instructions to Part II, the other specified items
in this part have been omitted because they are not applicable or the
information has been previously reported.
Item 2. Changes in Securities and Use of Proceeds
(e)
(1)
Information is as of the end of the Period. On January 16, 2003, the
Registrant announced that its board of directors had authorized the
repurchase from time to time of 8,000,000 shares of the Registrant’s common
stock (the “2003 Repurchase Program”). The 2003 Repurchase Program did not
have an expiration date. A total of 4,100,000 shares had been repurchased
under the 2003 Repurchase Program in 2003. No shares were repurchased in
the 2004 first quarter under the 2003 Repurchase Program or otherwise. On
April 27, 2004, the Registrant announced that its board of directors had
terminated the 2003 Repurchase Program and had authorized a new program for
the repurchase in the open market or through privately negotiated
transactions of 7,500,000 share of the Registrant’s common stock (the “2004
Repurchase Program”). The 2004 Repurchase Program does not have an
expiration date.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
78
79
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Huntington Bancshares
Incorporated
80
SECURITIES AND EXCHANGE COMMISSION
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED
September 30, 2004
Maryland
31-0724920
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
3
4
5
6
7
19
77
77
78
78
80
Exhibit 10(A)
Exhibit 10(B)
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
September 30,
December 31,
September 30,
(in thousands, except number of shares)
2004
2003
2003
(Unaudited)
(Unaudited)
$
1,053,358
$
899,689
$
775,423
838,833
96,814
87,196
36,155
33,627
37,857
120,334
7,589
415
205,913
226,729
411,792
4,150,044
4,929,060
4,283,475
22,587,259
21,075,118
21,172,747
(282,650
)
(299,732
)
(336,398
)
22,304,609
20,775,386
20,836,349
717,411
1,260,440
1,454,590
954,911
927,671
917,261
356,438
349,712
338,863
216,011
217,009
217,212
8,787
9,553
9,208
844,689
786,047
759,282
$
31,807,493
$
30,519,326
$
30,128,923
$
20,109,025
$
18,487,395
$
18,833,856
1,215,887
1,452,304
1,400,047
1,270,454
1,273,000
1,273,000
4,094,185
4,544,509
4,269,288
1,040,901
990,470
791,045
30,007
35,522
33,737
8,787
9,553
9,208
1,577,330
1,451,571
1,277,286
29,346,576
28,244,324
27,887,467
—
—
—
2,482,904
2,483,542
2,482,370
(526,967
)
(548,576
)
(550,766
)
(13,812
)
2,678
25,865
518,792
337,358
283,987
2,460,917
2,275,002
2,241,456
$
31,807,493
$
30,519,326
$
30,128,923
(Unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
(in thousands, except per share amounts)
2004
2003
2004
2003
$
284,790
$
277,906
$
823,562
$
813,845
474
588
1,423
1,997
38,987
36,311
127,059
110,450
7,032
6,199
21,792
16,171
6,719
12,316
14,264
28,196
338,002
333,320
988,100
970,659
64,812
67,565
183,810
223,658
3,121
2,992
9,222
12,864
8,426
5,883
24,565
17,102
34,585
36,409
98,197
92,364
110,944
112,849
315,794
345,988
227,058
220,471
672,306
624,671
11,785
51,615
42,408
137,652
215,273
168,856
629,898
487,019
64,412
117,624
231,985
384,391
43,935
42,294
129,368
123,077
17,064
15,365
50,095
45,856
13,200
13,807
41,920
43,500
4,448
30,193
23,474
48,503
10,019
10,438
31,813
32,618
10,799
10,499
30,957
32,209
312
—
14,206
23,751
—
13,112
—
13,112
7,803
(4,107
)
13,663
3,978
17,899
23,543
68,177
71,648
189,891
272,768
635,658
822,643
121,729
113,170
363,068
331,501
54,885
93,134
188,158
307,661
17,527
17,478
53,552
50,161
15,295
16,328
47,609
49,081
16,838
15,570
49,859
47,556
12,219
11,116
27,354
30,273
5,000
5,515
20,908
20,595
5,359
5,612
15,191
16,707
3,201
3,658
9,315
9,592
204
204
612
612
(1,151
)
—
(1,151
)
(6,315
)
22,317
18,397
66,755
55,270
273,423
300,182
841,230
912,694
131,741
141,442
424,326
396,968
38,255
37,230
116,540
104,536
93,486
104,212
307,786
292,432
—
(13,330
)
—
(13,330
)
$
93,486
$
90,882
$
307,786
$
279,102
234,348
230,966
233,307
231,353
$
0.40
$
0.45
$
1.32
$
1.26
0.40
0.39
1.32
1.21
0.200
0.175
0.550
0.495
Accumulated
Common Stock
Treasury Shares
Other
Comprehensive
Retained
(in thousands)
Shares
Amount
Shares
Amount
Income
Earnings
Total
257,866
$
2,484,421
(24,987
)
$
(475,399
)
$
62,300
$
118,471
$
2,189,793
279,102
279,102
(26,233
)
(26,233
)
(10,202
)
(10,202
)
242,667
(113,586
)
(113,586
)
(2,144
)
337
6,373
4,229
(4,300
)
(81,061
)
(81,061
)
93
(46
)
(679
)
(586
)
257,866
$
2,482,370
(28,996
)
$
(550,766
)
$
25,865
$
283,987
$
2,241,456
257,866
$
2,483,542
(28,858
)
$
(548,576
)
$
2,678
$
337,358
$
2,275,002
307,786
307,786
(19,555
)
(19,555
)
3,065
3,065
291,296
(126,352
)
(126,352
)
(564
)
985
18,865
18,301
(74
)
160
2,744
2,670
257,866
$
2,482,904
(27,713
)
$
(526,967
)
$
(13,812
)
$
518,792
$
2,460,917
(Unaudited)
Nine Months Ended
September 30,
(in thousands)
2004
2003
$
307,786
$
279,102
—
13,330
42,408
137,652
187,022
290,474
65,279
73,855
83,140
78,754
(112,745
)
(174
)
20,566
116,587
(13,663
)
(3,978
)
(14,206
)
(23,751
)
—
(13,112
)
(1,151
)
(6,315
)
(40,099
)
(155,245
)
524,337
787,179
(2,528
)
(557
)
746,386
1,343,838
1,655,459
887,936
(1,530,657
)
(3,140,336
)
1,534,395
1,475,948
(3,216,666
)
(3,457,605
)
357,184
473,727
—
(81,367
)
340
6,825
(43,924
)
(44,076
)
9,800
6,997
—
58,500
(490,211
)
(2,470,170
)
1,610,167
1,525,808
(236,417
)
(740,969
)
148,830
—
(100,000
)
(250,000
)
454
270,000
(3,000
)
(10,000
)
675,000
1,450,000
(1,130,000
)
(530,000
)
(121,773
)
(111,007
)
—
(81,061
)
18,301
4,076
861,562
1,526,847
895,688
(156,144
)
996,503
1,018,763
$
1,892,191
$
862,619
$
14,031
$
70,953
302,801
354,071
115,929
171,586
36,254
30,901
September 30,
December 31,
September 30,
(in thousands)
2004
2003
2003
$
1,368,787
$
2,136,502
$
2,416,907
(939
)
(2,117
)
(40,220
)
(650,437
)
(873,945
)
(922,097
)
$
717,411
$
1,260,440
$
1,454,590
September 30, 2004
December 31, 2003
September 30, 2003
Amortized
Amortized
Amortized
(in thousands of dollars)
Cost
Fair Value
Cost
Fair Value
Cost
Fair Value
$
—
$
—
$
1,374
$
1,376
$
325
$
329
24,230
24,551
31,356
31,454
32,855
33,611
754
842
271,271
275,540
270,529
281,343
—
—
—
—
—
—
24,984
25,393
304,001
308,370
303,709
315,283
2,773
2,831
19,899
20,434
21,289
21,931
100,827
101,157
198,755
201,995
235,180
239,766
939,050
929,892
1,593,139
1,595,594
1,594,938
1,607,969
1,042,650
1,033,880
1,811,793
1,818,023
1,851,407
1,869,666
499
510
173,181
175,505
193,091
197,357
564,302
562,705
585,561
593,662
389,418
403,841
317,312
307,070
403,953
390,164
404,776
398,626
—
—
201
192
—
—
882,113
870,285
1,162,896
1,159,523
987,285
999,824
1,949,747
1,929,558
3,278,690
3,285,916
3,142,401
3,184,773
7,180
7,199
7,989
8,058
8,345
8,414
9,396
9,596
21,706
22,260
27,056
27,804
86,677
87,788
70,253
71,755
46,521
47,408
293,322
297,519
332,181
334,188
316,469
316,552
396,575
402,102
432,129
436,261
398,391
400,178
—
—
1,973
1,973
—
—
—
—
—
—
—
—
—
—
—
—
—
—
564,084
560,563
388,933
388,684
192,869
193,149
564,084
560,563
390,906
390,657
192,869
193,149
—
—
—
—
—
—
30,000
29,944
30,000
29,944
30,000
29,944
9,725
9,838
20,000
19,984
20,000
19,839
1,051,982
1,053,020
590,826
589,788
278,498
277,977
1,091,707
1,092,802
640,826
639,716
328,498
327,760
1,601
1,612
500
502
1,490
1,497
9,612
9,968
7,169
7,346
9,327
9,772
2,253
2,351
5,047
5,510
4,045
4,422
144,201
144,707
145,103
146,685
141,901
143,436
—
—
5,593
6,356
5,671
5,960
5,965
6,381
8,547
10,111
11,529
12,528
163,632
165,019
171,959
176,510
173,963
177,615
$
4,165,745
$
4,150,044
$
4,914,510
$
4,929,060
$
4,236,122
$
4,283,475
Three Months Ended
Nine Months Ended
September 30,
September 30,
(in thousands)
2004
2003
2004
2003
$
58,167
$
(37,796
)
$
(16,588
)
$
(35,997
)
(20,484
)
13,284
5,914
12,350
37,683
(24,512
)
(10,674
)
(23,647
)
7,803
(4,107
)
13,663
3,978
(2,731
)
1,437
(4,782
)
(1,392
)
5,072
(2,670
)
8,881
2,586
32,611
(21,842
)
(19,555
)
(26,233
)
(29,568
)
10,600
4,715
(15,695
)
10,349
(3,710
)
(1,650
)
5,493
(19,219
)
6,890
3,065
(10,202
)
$
13,392
$
(14,952
)
$
(16,490
)
$
(36,435
)
September 30,
December 31,
September 30,
(in millions)
2004
2003
2003
5,094
5,712
5,204
3,898
3,652
3,488
483
952
927
989
983
1,022
179
166
178
•
$39.8 million, or 77%, reduction in the provision for credit losses,
reflecting improved credit quality performance,
•
$26.8 million, or 9%, reduction in non-interest expense, primarily
due to a decline in operating lease expense,
•
$6.9 million, or 3%, increase in fully taxable equivalent net
interest income, reflecting the benefit of an increase in earning
assets, primarily loans and leases, partially offset by a decline in the
net interest margin, and
•
$13.3 million cumulative effect of a change in accounting principle,
net of tax, in the year-ago quarter.
•
$82.9 million, or 30%, decline in non-interest income, reflecting
declines in operating lease income, mortgage banking income, gains on
sale of automobile loans, and gain on sale of West Virginia banking
offices, partially
offset by higher investment securities gains, and
•
$1.0 million, or 3%, increase in income tax expense, reflecting the impact of a higher effective tax rate.
•
$28.2 million, or 13%, decline in non-interest income, primarily due
to declines in mortgage banking and operating lease income, partially
offset by higher investment securities gains, and
•
$6.8 million increase in the provision for credit losses, as the 2004
second quarter included the benefit of a $9.7 million one-time recovery
on a single commercial (C&I) credit.
•
$8.7 million, or 3%, decline in non-interest expense, primarily due to lower operating lease expense, and
•
$4.4 million, or 2%, increase in fully taxable equivalent net
interest income, reflecting the benefit of an increase in earning
assets, primarily loans and leases, as well as a slight increase in the
net interest margin,
•
$5.1 million, or 12%, reduction in income tax expense, primarily as a
result of the lower level of pre-tax income.
•
$95.2 million, or 69%, reduction in the provision for credit losses,
reflecting improved credit quality performance,
•
$71.5 million, or 8%, reduction in non-interest expense, primarily
due to a decline in operating lease expense, partially offset by higher
personnel costs,
•
$49.7 million, or 8%, increase in fully taxable equivalent net
interest income, reflecting the benefit of an increase in earning
assets, primarily loans and leases, partially offset by a decline in the
net interest margin, and
•
$13.3 million cumulative effect of a change in accounting principle,
net of tax, in the year-ago period.
•
$187.0 million, or 23%, decline in non-interest income, reflecting
declines in operating lease income, mortgage banking income, and gains
on sale of automobile loans and the absence of a gain on the sale of
branch offices in the year-ago period, and
•
$12.0 million, or 11%, increase in income tax expense, reflecting
higher level of pre-tax income, as well as the impact of a slightly
higher effective tax rate.
(1)
Due to the adoption of FASB Interpretation No. 46 for variable interest entities.
(2)
Based on income before cumulative effect of change in accounting principle, net of tax.
(3)
On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
(4)
Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains (losses).
Nine Months Ended September 30,
2004 vs. 2003
(in thousands of dollars, except per share amounts)
2004
2003
Amount
%
$
988,100
$
970,659
$
17,441
1.8
%
315,794
345,988
(30,194
)
(8.7
)
672,306
624,671
47,635
7.6
42,408
137,652
(95,244
)
(69.2
)
629,898
487,019
142,879
29.3
231,985
384,391
(152,406
)
(39.6
)
129,368
123,077
6,291
5.1
50,095
45,856
4,239
9.2
41,920
43,500
(1,580
)
(3.6
)
23,474
48,503
(25,029
)
(51.6
)
31,813
32,618
(805
)
(2.5
)
30,957
32,209
(1,252
)
(3.9
)
14,206
23,751
(9,545
)
(40.2
)
—
13,112
(13,112
)
N.M.
13,663
3,978
9,685
N.M.
68,177
71,648
(3,471
)
(4.8
)
635,658
822,643
(186,985
)
(22.7
)
363,068
331,501
31,567
9.5
188,158
307,661
(119,503
)
(38.8
)
53,552
50,161
3,391
6.8
47,609
49,081
(1,472
)
(3.0
)
49,859
47,556
2,303
4.8
27,354
30,273
(2,919
)
(9.6
)
20,908
20,595
313
1.5
15,191
16,707
(1,516
)
(9.1
)
9,315
9,592
(277
)
(2.9
)
612
612
—
—
—
—
—
—
(1,151
)
(6,315
)
5,164
(81.8
)
66,755
55,270
11,485
20.8
841,230
912,694
(71,464
)
(7.8
)
424,326
396,968
27,358
6.9
116,540
104,536
12,004
11.5
307,786
292,432
15,354
5.3
—
(13,330
)
13,330
N.M.
$
307,786
$
279,102
$
28,684
10.3
%
$
1.32
$
1.26
$
0.06
4.8
%
1.32
1.21
0.11
9.1
0.550
0.495
0.055
11.1
1.32
%
1.37
%
(0.06
)%
(4.1
)%
17.6
17.9
(0.32
)
(1.8
)
3.31
3.52
(0.21
)
(6.0
)
64.5
62.9
1.61
2.6
27.5
26.3
1.13
4.3
$
672,306
$
624,671
$
47,635
7.6
%
8,806
6,730
2,076
30.8
681,112
631,401
49,711
7.9
635,658
822,643
(186,985
)
(22.7
)
$
1,316,770
$
1,454,044
$
(137,274
)
(9.4
)%
(1)
Due to the adoption of FASB Interpretation No. 46 for variable interest entities.
(2)
Based on income before cumulative effect of change in accounting principle, net of tax.
(3)
On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
(4)
Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains.
1.
Automobile leases originated through April 2002 are accounted
for as operating leases – Automobile leases originated before May
2002 are accounted for using the operating lease method of accounting
because they do not qualify as direct financing leases. Operating
leases are a non-interest earning asset with the related rental
income, other revenue, and credit recoveries reflected as operating
lease income, a component of non-interest income. Under this
accounting method, depreciation expenses, as well as other costs and
charge-offs, are reflected as operating lease expense, a component of
non-interest expense. With no new operating leases originated since
April 2002, the operating lease assets are rapidly decreasing and
will eventually run-off, along with related operating lease income
and expense. Since operating lease income and expense represent a
significant percentage of total non-interest income and expense,
respectively, throughout this reporting period, their downward trend
influences total non-interest income and non-interest expense trends.
Automobile leases originated since April 2002 are accounted for as
direct financing leases, an interest earning asset included in total
loans and leases with the related income reflected as interest income
and included in the calculation of the net interest margin. Credit
charge-offs and recoveries are reflected in the allowance for loan and
lease losses (ALLL), with related changes in the ALLL reflected in
provision for credit losses. The relative newness and rapid growth of
this portfolio has resulted in higher reported automobile lease growth
rates than in a more mature portfolio. To better understand overall
trends in automobile lease exposure, it is helpful to compare trends in
the combined total of automobile leases plus operating leases (see the
company’s 2003 Form 10-K for a full discussion).
2.
Transition from a weak economic environment in 2003 to a slow
recovering economic environment in 2004. The weak economic
environment resulted in continued weak demand for commercial and
industrial (C&I) loans, which, when combined with strategies to lower
the overall credit risk profile of the company (see below), has
contributed to generally declining C&I loans throughout this period.
3.
Declining interest rates in 2003 with generally increasing,
though fluctuating, interest rates in 2004. Interest rates impacted,
among other factors, loan and deposit growth, the net interest
margin, and the valuation of mortgage servicing rights (MSRs) and
investment securities.
•
The historically low interest rate environment in 2003
and 2004, despite a general increase in short-term rates during
the first nine months of 2004, resulted in strong demand and
resultant growth in residential real estate, home equity, and
commercial real estate (CRE) loans generally throughout this
period. Mortgage banking revenue was also favorably impacted by
the significant mortgage origination activity.
•
As interest rates fell in 2003, it became increasingly
difficult to lower interest rates offered on deposit accounts
commensurate with the overall decline in interest rates and yields
on earning assets. This created an extremely competitive
environment in which to grow deposits and resulted in an inability
to lower deposit rates commensurate with the overall decline in
earning asset rates. This contributed to the decline in the net
interest margin throughout 2003. Though short-term interest rates
have risen generally throughout the first nine months of 2004,
they remain at historically low levels and the competition for
deposits has remained very competitive. As a result, deposit
rates have also risen thus not permitting much expansion in the
net interest margin.
•
Since the second quarter of 2002, the company generally
has retained the servicing on mortgage loans it originates and
sells. The mortgage servicing right (MSR) represents the present
value of expected future net servicing income for the loan. MSR
values are very sensitive to movements in interest rates.
Expected future net servicing income depends on the projected
outstanding principal balances of the underlying loans, which can
be greatly reduced by prepayments. Prepayments usually increase
when mortgage interest rates decline and decrease when mortgage
interest rates rise. Thus, as interest rates decline, less future
income is expected and the value of MSRs declines and becomes
impaired when the valuation is less than the recorded book value.
The company recognizes temporary impairment due to change in
interest rates through a valuation reserve and records a direct
write-down of the book value of its MSRs
for other-than-temporary declines in valuation. Changes and
fluctuations in interest rate levels between quarters resulted in
some quarters reporting an MSR temporary impairment, with others
reporting a recovery of previously reported MSR temporary
impairment. Such swings in MSR valuations have significantly
impacted quarterly mortgage banking income throughout this period
(see Table 3).
•
The company uses gains or losses on investment
securities, and more recently gains or losses on trading account
assets, to offset MSR temporary valuation changes. As a result,
changes in interest rate levels have also resulted in securities
gains or losses and trading losses. As such, in quarters where an
MSR temporary impairment is recognized, investment securities
and/or trading account assets were sold resulting in a gain on
sale, and vice versa. Investment securities gains or losses are
reflected in the income statement in a single non-interest income
line item, whereas trading gains or losses are a component of
other non-interest income on the income statement. The earnings
impact of the MSR valuation change and securities gain/loss may
not exactly offset due to, among other factors, the difference in
the timing of when the MSR valuation is determined and recorded,
compared with when the securities are sold and any gain or loss is
recorded (see Table 3).
4.
Management strategies to lower the overall credit risk profile
of the balance sheet. Throughout this period, certain strategies
were implemented to lower the overall credit risk profile of the
balance sheet with the objective of lowering the volatility of
earnings.
•
Automobile loan sales – One strategy has been to lower
the credit exposure to automobile loans and leases to at least 20%
of total credit exposure, as manifested through the sale of
automobile loans. These sales of higher-rate, higher-risk loans
impact results in a number of ways including: lower growth rates
in automobile, total consumer, and total company loans; the
generation of gains reflected in non-interest income; lower net
interest income than otherwise would be the case if the loans were
not sold; and lower net interest margin (see Table 3).
•
Reduction in large-individual C&I and CRE credits – This
strategy has been reflected in the reduction in shared national
credits, as well as other, mostly C&I loans. In addition, the
company sold and charged-off lower-quality C&I and CRE credits in
2003 and 2004. This strategy was a contributing factor in the
declines in C&I loan balances, NPAs, and the ALLL. In certain
quarters, this strategy contributed to higher C&I net charge-offs.
5.
Adoption of FIN 46 – Effective July 1, 2003, the company
adopted Financial Accounting Standards Board (FASB) Interpretation
No. 46 (FIN 46),
Consolidation of Variable Interest Entities
. The
adoption of FIN 46 resulted in the consolidation of $1.0 billion of
previously securitized automobile loans and a $13.3 million after-tax
charge in the 2003 third quarter for the cumulative effect of a
change in accounting principle (see Tables 1 and 2).
6.
Corporate Restructuring Charges – 2003 and 2004 non-interest
expense reflected recoveries of previously established corporate
restructuring reserves, which were no longer needed (see Table 3) and
lowered 2003 and 2004 non-interest expense (see Note 21 of the
company’s 2003 Form 10-K Notes to Consolidated Financial Statements).
7.
Single commercial recovery – A single commercial credit
recovery in the 2004 second quarter on a loan previously charged off
in the 2002 fourth quarter favorably impacted the 2004 second quarter
provision expense (see Table 3), as well as C&I, total commercial,
and total net charge-offs for the quarter (see Table 11).
8.
Gain on the sale of West Virginia banking offices – In the 2003
third quarter, the company sold four banking offices in West Virginia
which resulted in a $13.1 million gain (see Tables 1 and 2).
9.
SEC related expenses and accruals – As previously disclosed,
the Securities and Exchange Commission (SEC) is conducting a formal
investigation regarding certain financial accounting and disclosure
matters, including certain matters that were the subject of prior
restatements by Huntington (see Note 3 of the Notes to Unaudited
Condensed Consolidated Financial Statements). For the first nine
months of 2004, the company recorded certain expenses and accruals
related to this investigation, most notably in the third quarter (see
Table 3).
10.
Unizan system conversion expenses – On January 27, Huntington
announced the signing of a definitive agreement to acquire Unizan
Financial Corp. (Unizan), a financial holding company based in
Canton, Ohio (see Note 4 of the Notes to Unaudited Condensed
Consolidated Financial Statements). In the 2004 third quarter, the
company recorded certain integration planning and system conversion
expenses related to this pending acquisition (see Table 3).
Impact
(in millions, except per share )
Pre-tax
EPS
$
131.7
$
0.40
(5.5
)
(0.02
)
(1.8
)
(0.01
)
(4.1
)
(0.01
)
(2.3
)
(0.01
)
7.8
0.02
$
141.4
$
0.45
(4.7
)
(0.01
)
13.1
0.04
17.8
0.05
(4.1
)
(0.01
)
$
424.3
$
1.32
(7.1
)
(0.02
)
(2.7
)
(0.01
)
14.2
0.04
(2.3
)
(0.01
)
13.7
0.04
9.7
0.03
$
397.0
$
1.26
(5.1
)
(0.01
)
13.1
0.04
23.8
0.07
11.4
0.03
4.0
0.01
6.3
0.02
Average Balances
Change
(in millions)
2004
2003
3Q04 vs. 3Q03
Fully Taxable Equivalent Basis
Third
Second
First
Fourth
Third
Amount
Percent
$
55
$
69
$
79
$
83
$
90
$
(35
)
(38.9
)%
148
28
16
11
11
137
N.M.
318
168
92
117
103
215
N.M.
283
254
207
295
898
(615
)
(68.5
)
4,340
4,861
4,646
4,093
3,646
694
19.0
398
410
437
421
362
36
9.9
4,738
5,271
5,083
4,514
4,008
730
18.2
5,339
5,536
5,365
5,382
5,380
(41
)
(0.8
)
1,577
1,322
1,322
1,297
1,258
319
25.4
2,890
2,906
2,876
2,830
2,744
146
5.3
1,857
2,337
3,041
3,529
3,594
(1,737
)
(48.3
)
2,250
2,139
1,988
1,802
1,590
660
41.5
4,107
4,476
5,029
5,331
5,184
(1,077
)
(20.8
)
3,970
3,824
3,693
3,556
3,443
527
15.3
3,906
3,326
2,846
2,624
2,122
1,784
84.1
406
377
371
386
381
25
6.6
12,389
12,003
11,939
11,897
11,130
1,259
11.3
22,195
21,767
21,502
21,406
20,512
1,683
8.2
(288
)
(310
)
(313
)
(350
)
(330
)
42
(12.7
)
21,907
21,457
21,189
21,056
20,182
1,725
8.5
27,737
27,557
26,979
26,426
25,622
2,115
8.3
800
977
1,166
1,355
1,565
(765
)
(48.9
)
928
772
740
766
747
181
24.2
216
216
217
217
218
(2
)
(0.9
)
2,072
2,101
2,046
2,008
2,061
11
0.5
$
31,465
$
31,313
$
30,835
$
30,422
$
29,883
$
1,582
5.3
%
$
3,276
$
3,223
$
3,017
$
3,131
$
3,218
$
58
1.8
%
7,384
7,168
6,609
6,466
6,558
826
12.6
2,841
2,839
2,819
2,824
2,808
33
1.2
2,414
2,400
2,399
2,492
2,561
(147
)
(5.7
)
595
600
637
631
656
(61
)
(9.3
)
16,510
16,230
15,481
15,544
15,801
709
4.5
886
795
788
828
803
83
10.3
1,755
1,737
1,907
1,851
1,421
334
23.5
476
542
549
522
536
(60
)
(11.2
)
19,627
19,304
18,725
18,745
18,561
1,066
5.7
1,342
1,396
1,603
1,433
1,393
(51
)
(3.7
)
1,270
1,270
1,273
1,273
1,273
(3
)
(0.2
)
5,244
5,623
5,557
5,432
5,197
47
0.9
24,207
24,370
24,141
23,752
23,206
1,001
4.3
1,570
1,397
1,399
1,311
1,220
350
28.7
2,412
2,323
2,278
2,228
2,239
173
7.7
$
31,465
$
31,313
$
30,835
$
30,422
$
29,883
$
1,582
5.3
%
Average Rates
(2)
2004
2003
Fully Taxable Equivalent Basis
(1)
Third
Second
First
Fourth
Third
0.91
%
1.05
%
0.71
%
0.60
%
0.51
%
4.44
3.02
3.98
2.39
4.70
1.53
1.21
1.41
1.30
1.92
5.25
5.17
5.33
5.31
5.16
3.83
3.83
4.06
4.24
4.23
7.06
7.07
6.88
6.91
6.93
4.10
4.09
4.30
4.49
4.47
4.63
4.25
4.49
4.82
4.84
4.11
3.70
3.68
4.24
4.17
4.76
4.57
4.70
4.99
5.22
7.65
7.20
6.93
6.90
7.19
5.02
5.06
4.94
4.98
4.99
6.21
6.17
6.14
6.25
6.51
4.72
4.73
4.47
4.75
5.03
5.52
5.36
5.16
5.24
5.34
6.89
6.33
5.62
8.15
7.93
5.54
5.49
5.52
5.64
5.87
5.12
4.95
5.04
5.26
5.41
4.89
%
4.76
%
4.89
%
5.11
%
5.23
%
1.06
%
0.94
%
0.88
%
0.91
%
1.04
%
0.83
0.82
0.94
1.22
1.35
3.32
3.27
3.47
3.54
3.51
3.22
3.19
3.48
3.69
3.89
1.52
1.45
1.53
1.65
1.76
2.40
2.37
2.14
2.37
2.32
1.84
1.57
1.51
1.52
1.63
0.83
0.76
0.72
0.75
0.85
1.58
1.48
1.53
1.64
1.75
0.92
0.80
0.83
0.78
0.85
2.60
2.52
2.50
2.24
1.81
2.62
2.24
2.33
2.63
2.78
1.82
%
1.66
%
1.71
%
1.85
%
1.93
%
3.07
%
3.10
%
3.18
%
3.26
%
3.30
%
0.23
0.19
0.18
0.16
0.16
3.30
%
3.29
%
3.36
%
3.42
%
3.46
%
(1)
Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate. See Table 1 for the FTE adjustment.
(2)
Loan and lease and deposit average rates include impact of applicable derivatives and non-deferrable fees.
(3)
Consumer loans that are secured by a first mortgage on
residential property are presented as “residential mortgage loans.” Consumer loans that are secured by a junior mortgage on residential property are presented as “Home equity loans.” Reclassification of prior period balances have been made to conform with this presentation.
(4)
The 2004 second quarter calculation has been corrected to conform to other periods presented.
YTD Average Balances
YTD Average Rates
(2)
(in millions)
Nine Months Ending Sept 30,
2004 vs. 2003
Nine Months Ending Sept 30,
Fully Tax Equivalent Basis
(1)
2004
2003
Amount
%
2004
2003
$
67
$
58
$
9
15.5
0.88
%
1.53
%
64
16
48
N.M.
4.17
4.41
193
76
117
N.M.
1.42
2.05
248
654
(406
)
(62.1
)
5.24
5.32
4,615
3,350
1,265
37.8
3.91
4.63
415
304
111
36.5
7.00
7.09
5,030
3,654
1,376
37.7
4.17
4.83
5,413
5,542
(129
)
(2.3
)
4.45
5.17
1,408
1,229
179
14.6
3.85
4.22
2,891
2,644
247
9.3
4.67
5.31
2,410
3,170
(760
)
(24.0
)
7.20
7.56
2,126
1,304
822
63.0
5.00
5.15
4,536
4,474
62
1.4
6.17
6.86
3,830
3,337
493
14.8
4.65
4.97
3,361
1,958
1,403
71.7
5.36
5.64
384
383
1
0.3
6.30
7.92
12,111
10,152
1,959
19.3
5.52
6.05
21,823
19,567
2,256
11.5
5.03
5.59
(314
)
(350
)
36
(10.3
)
21,509
19,217
2,292
11.9
27,425
24,025
3,400
14.2
4.84
%
5.45
%
980
1,812
(832
)
(45.9
)
814
740
74
10.0
216
218
(2
)
(0.9
)
2,074
2,010
64
3.2
$
31,195
$
28,455
$
2,740
9.6
$
3,172
$
3,063
$
109
3.6
7,055
6,100
955
15.7
0.96
%
1.28
%
2,833
2,795
38
1.4
0.86
1.58
2,404
2,773
(369
)
(13.3
)
3.35
3.72
611
670
(59
)
(8.8
)
3.30
3.91
16,075
15,401
674
4.4
1.50
2.04
823
793
30
3.8
2.31
2.54
1,800
1,274
526
41.3
1.64
1.79
522
492
30
6.1
0.77
0.98
19,220
17,960
1,260
7.0
1.53
2.01
1,447
1,656
(209
)
(12.6
)
0.85
1.04
1,271
1,253
18
1.4
2.54
1.80
5,474
4,265
1,209
28.3
2.39
2.89
24,240
22,071
2,169
9.8
1.74
%
2.09
%
1,445
1,137
308
27.1
2,338
2,184
154
7.1
$
31,195
$
28,455
$
2,740
9.6
3.10
%
3.36
%
0.21
0.16
3.31
%
3.52
%
2004
2003
3Q04 vs. 3Q03
(in thousands)
Third
Second
First
Fourth
Third
Amount
Percent
$
43,935
$
43,596
$
41,837
$
44,763
$
42,294
$
1,641
3.9
%
17,064
16,708
16,323
15,793
15,365
1,699
11.1
13,200
13,523
15,197
14,344
13,807
(607
)
(4.4
)
4,448
23,322
(4,296
)
9,677
30,193
(25,745
)
(85.3
)
10,019
11,309
10,485
10,410
10,438
(419
)
(4.0
)
312
4,890
9,004
16,288
—
312
—
—
—
—
—
13,112
(13,112
)
N.M.
10,799
10,645
9,513
9,237
10,499
300
2.9
7,803
(9,230
)
15,090
1,280
(4,107
)
11,910
N.M.
17,899
24,659
25,619
19,411
23,543
(5,644
)
(24.0
)
125,479
139,422
138,772
141,203
155,144
(29,665
)
(19.1
)
64,412
78,706
88,867
105,307
117,624
(53,212
)
(45.2
)
$
189,891
$
218,128
$
227,639
$
246,510
$
272,768
$
(82,877
)
(30.4
)%
•
$25.7 million, or 85%, decrease in mortgage banking income. This
reflected a $21.9 million change in MSR temporary impairment valuations,
as the current quarter included a $4.1 million MSR temporary impairment
compared with a $17.8 million recovery of previously recorded MSR
temporary impairment recognized in the year-ago quarter. MSR valuations
are very sensitive to movements in interest rates. Excluding the MSR
temporary impairment valuation change between quarters, mortgage banking
income decreased $3.8 million, primarily reflecting lower secondary
marketing gains and lower origination volume.
•
$13.1 million gain on sale of branch offices in the year ago quarter
with no such gain in the current quarter.
•
$5.6 million, or 24%, decline in other income due to lower investment
banking income and the MSR-related trading loss. To offset the
volatility that results from recognizing temporary MSR valuation
changes, Huntington has used investment securities and, more recently,
other trading account assets, including forward commitments
•
$11.9 million increase in investment securities gains as the current
quarter reflected gains of $7.8 million compared with $4.1 million of
securities losses in the year-ago quarter.
•
$1.7 million, or 11%, increase in trust services income as a result
of higher personal trust fees, reflecting higher average asset values
and higher money market mutual fund fees.
•
$1.6 million, or 4%, increase in service charges on deposit accounts
due to higher service charges on personal accounts.
•
$18.9 million, or 81%, decrease in mortgage banking income. This
reflected a $19.0 million change in MSR temporary impairment valuations,
as the current quarter included a $4.1 million MSR temporary impairment
compared with a $14.9 million recovery of previously recorded MSR
temporary impairment recognized in the second quarter. This increase in
MSR temporary impairment valuation between quarters reflected the
downward movement in mortgage interest rates in the third quarter. The
MSR temporary impairment valuation reserve at September 30, 2004 was
$5.5 million. Reflecting the decline in interest rates during the
quarter, the value of MSRs as a percent of mortgages serviced for others
was 1.13%, down from 1.21% at June 30, 2004.
•
$6.8 million, or 27%, decrease in other income reflecting the
MSR-related trading loss in the current quarter, as well as a decline in
investment banking and trading fee income.
•
$4.6 million decrease in gain on sale of automobile loans as the
current quarter reflected $0.3 million of gains, compared with $4.9
million of gains in the second quarter.
•
$17.0 million increase in securities gains (losses), with the current
quarter reflecting $7.8 million in securities gains, compared with $9.2
million of securities losses in the 2004 second quarter.
•
$25.0 million, or 52%, decline in mortgage banking income. This
reflected a $10.8 million change in MSR temporary impairment valuations,
as the current nine-month period included $0.6 million recovery of
previously recorded MSR temporary impairment compared with an $11.4
million recovery of previously recorded MSR temporary impairment in the
comparable year-ago period. The remainder of the decline primarily
reflected lower secondary marketing gains and lower origination volume.
•
$13.1 million gain on sale of branch offices in the year-ago
nine-month period with no such gain in the comparable
current year period.
•
$9.5 million reduction in the gain on sale of automobile loans.
•
$3.5 million decline in other income, including a $2.3 million loss
on trading activity in the current year period to offset MSR temporary
valuation changes, as well as lower investment banking income.
•
$9.7 million increase in gains from the sale of investment securities
to offset MSR temporary valuation changes.
•
$6.3 million, or 5%, increase in service charges on deposit accounts.
•
$4.2 million, or 9%, increase in trust services.
2004
2003
3Q04 vs. 3Q03
(in thousands)
Third
Second
First
Fourth
Third
Amount
Percent
$
121,729
$
119,715
$
121,624
$
115,762
$
113,170
$
8,559
7.6
%
17,527
17,563
18,462
15,957
17,478
49
0.3
15,295
16,228
16,086
16,840
16,328
(1,033
)
(6.3
)
16,838
16,258
16,763
14,925
15,570
1,268
8.1
12,219
7,836
7,299
12,175
11,116
1,103
9.9
5,000
8,069
7,839
6,895
5,515
(515
)
(9.3
)
5,359
4,638
5,194
5,272
5,612
(253
)
(4.5
)
3,201
3,098
3,016
3,417
3,658
(457
)
(12.5
)
204
204
204
204
204
—
—
—
—
—
15,250
—
—
—
(1,151
)
—
—
(351
)
—
(1,151
)
—
22,317
25,981
18,457
25,510
18,397
3,920
21.3
218,538
219,590
214,944
231,856
207,048
11,490
5.5
54,885
62,563
70,710
85,609
93,134
(38,249
)
(41.1
)
$
273,423
$
282,153
$
285,654
$
317,465
$
300,182
$
(26,759
)
(8.9
)%
•
$8.6 million, or 8%, increase in personnel costs primarily reflecting
higher salaries and benefits expense, partially offset by lower sales
commissions due to weaker mortgage origination and capital market
activities.
•
$3.9 million, or 21%, increase in other expense reflecting higher
automobile lease residual value losses, as well as SEC-related expenses
and accruals.
•
$1.3 million, or 8%, increase in net occupancy expense.
•
$1.1 million, or 10%, increase in professional services including SEC-related expenses.
•
$1.2 million benefit from the release of restructuring reserves in the current quarter.
•
$1.0 million, or 6%, decline in equipment expense.
•
$3.7 million, or 14%, decrease in other expense as the second quarter
included $5.8 million of costs related to investments in partnerships
generating tax benefits for the first half of 2004. The 2004 third
quarter other expense included automobile lease residual value losses,
as well as SEC-related expenses and accruals.
•
$3.1 million, or 38%, decrease in marketing expense due to lower advertising expenditures.
•
$1.2 million benefit from the release of restructuring reserves in the current quarter.
•
$4.4 million, or 56%, increase in professional services primarily reflecting SEC-related expenses.
•
$2.0 million, or 2%, increase in personnel costs.
•
$31.6 million, or 10%, increase in personnel costs primarily
reflecting a $17.3 million, or 28%, increase in benefits expense and an
$17.0 million, or 8%, increase in salaries.
•
$11.5 million, or 21%, increase in other expense reflecting $5.8
million of costs related to investments in partnerships generating tax
benefits in the current nine-month period and to a lesser degree
accruals for pending litigation and SEC-related costs.
•
$5.2 million in restructuring reserve releases that lowered expenses
in the year-ago nine-month period.
2004
2003
3Q04 vs. 3Q03
Third
Second
First
Fourth
Third
Amount
Percent
$
800
$
977
$
1,166
$
1,355
$
1,565
$
(765
)
(49)
%
$
60,267
$
72,402
$
83,517
$
98,223
$
109,645
$
(49,378
)
(45)
%
2,965
4,838
3,543
5,204
5,372
(2,407
)
(44.8
)
1,180
1,466
1,807
1,880
2,607
(1,427
)
(54.7
)
64,412
78,706
88,867
105,307
117,624
(53,212
)
(45.2
)
49,917
57,412
63,823
76,768
83,112
(33,195
)
(39.9
)
4,968
5,151
6,887
8,841
10,022
(5,054
)
(50.4
)
54,885
62,563
70,710
85,609
93,134
(38,249
)
(41.1
)
$
9,527
$
16,143
$
18,157
$
19,698
$
24,490
$
(14,963
)
(61.1)
%
30.1
%
29.6
%
28.7
%
29.0
%
28.0
%
2.1
%
7.5
%
25.0
23.5
21.9
22.7
21.2
3.7
17.5
(1)
As a percent of average operating lease assets, quartlery amounts annualized.
September 30, 2004
June 30, 2004
(1)
March 31, 2004
December 31, 2003
September 30, 2003
(in millions)
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
$
5,440
23.3
%
$
5,277
23.3
%
$
5,480
24.6
%
$
5,314
23.8
%
$
5,433
24.0
%
4,473
19.2
4,514
19.9
4,272
19.2
4,172
18.6
4,047
17.8
9,913
42.5
9,791
43.2
9,752
43.7
9,486
42.4
9,480
41.8
1,885
8.1
1,814
8.0
2,267
10.2
2,992
13.4
3,709
16.4
2,317
9.9
2,185
9.6
2,066
9.3
1,902
8.5
1,688
7.4
4,047
17.4
3,906
17.2
3,757
16.9
3,639
16.3
3,498
15.4
4,004
17.2
3,690
16.3
2,976
13.4
2,681
12.0
2,415
10.6
422
1.8
389
1.7
375
1.7
375
1.7
383
1.7
12,675
54.4
11,984
52.9
11,441
51.3
11,589
51.8
11,693
51.6
$
22,588
96.9
$
21,775
96.1
$
21,193
95.1
$
21,075
94.2
$
21,173
93.4
717
3.1
889
3.9
1,071
4.8
1,260
5.6
1,455
6.4
—
—
—
—
28
0.1
37
0.2
49
0.2
$
23,305
100.0
%
$
22,664
100.0
%
$
22,292
100.0
%
$
22,372
100.0
%
$
22,677
100.0
%
$
4,919
21.1
%
$
4,888
21.6
%
$
5,432
24.4
%
$
6,191
27.7
%
$
6,901
30.4
%
$
5,944
25.5
%
$
5,652
24.9
%
$
4,988
22.4
%
$
4,652
20.8
%
$
4,491
19.8
%
2,809
12.1
2,694
11.9
2,681
12.0
2,579
11.5
2,639
11.6
1,826
7.8
1,759
7.8
1,703
7.6
1,677
7.5
1,623
7.2
2,236
9.6
2,216
9.8
2,155
9.7
2,077
9.3
2,028
8.9
1,388
6.0
1,359
6.0
1,341
6.0
1,268
5.7
1,306
5.8
866
3.7
811
3.6
808
3.6
802
3.6
802
3.5
863
3.7
811
3.6
753
3.4
731
3.3
741
3.3
15,932
68.4
15,302
67.5
14,429
64.7
13,786
61.7
13,630
60.1
5,774
24.8
5,840
25.8
6,399
28.7
7,095
31.6
7,598
33.5
1,395
6.0
1,381
6.1
1,322
5.9
1,296
5.8
1,260
5.6
204
0.9
141
0.6
142
0.7
195
0.9
189
0.8
$
23,305
100.0
%
$
22,664
100.0
%
$
22,292
100.0
%
$
22,372
100.0
%
$
22,677
100.0
%
(1)
Effective June 30, 2004, $282 million of commercial and industrial loans were reclassified to commercial real estate to conform to the classification of these loans with the presentation of similar loans.
(2)
Consumer loans that are secured by a first mortgage on residential property are presented as “residential mortgage loans.” Consumer loans that are secured by a junior mortgage on residential property are presented
as “Home equity loans.” Reclassification of prior period balances have been made to conform with this presentation.
(3)
Sum of automobile loans and leases, operating lease assets, and securitized loans.
(4)
Prior period amounts have been reclassified to conform to the current period business segment structure.
2004
2003
(in thousands)
Third
Second
First
Fourth
Third
$
972
$
(2,803
)
$
5,956
$
31,186
$
12,222
1,592
2,940
1,637
5,743
3,621
2,564
137
7,593
36,929
15,843
5,142
5,604
13,422
11,346
10,773
2,415
2,159
3,159
1,936
1,450
7,557
7,763
16,581
13,282
12,223
4,527
3,019
3,116
3,464
3,416
534
302
316
174
246
1,298
1,294
1,021
1,294
1,046
13,916
12,378
21,034
18,214
16,931
$
16,480
$
12,515
$
28,627
$
55,143
$
32,774
2004
2003
Third
Second
First
Fourth
Third
0.07
%
(0.20)
%
0.44
%
2.32
%
$
0.91
%
0.14
0.28
0.16
0.56
0.36
0.10
0.01
0.32
1.55
0.68
1.11
0.96
1.77
1.29
1.20
0.43
0.40
0.64
0.43
0.36
0.74
0.69
1.32
1.00
0.94
0.46
0.32
0.34
0.39
0.40
0.05
0.04
0.04
0.03
0.05
1.28
1.38
1.11
1.34
1.10
0.45
0.41
0.70
0.61
0.61
0.30
%
0.23
%
0.53
%
1.03
%
0.64
%
Nine Months Ending
September 30,
(in thousands)
2004
2003
$
4,125
$
53,672
6,169
4,774
10,294
58,446
24,168
28,920
7,733
3,792
31,901
32,712
10,662
11,140
1,152
658
3,613
3,710
47,328
48,220
$
57,622
$
106,666
Nine Months Ending
September 30,
2004
2003
0.10
%
1.29
%
0.19
0.16
0.14
0.83
1.34
1.22
0.48
0.39
0.94
0.97
0.37
0.45
0.05
0.04
1.25
1.29
0.52
0.63
0.35
%
0.73
%
September 30,
June 30,
March 31,
December 31,
September 30,
(in thousands)
2004
2004
2004
2003
2003
$
27,140
$
32,044
$
45,056
$
43,387
$
82,413
19,762
15,782
20,019
22,399
30,545
13,197
13,952
12,052
9,695
8,923
7,685
—
—
—
—
67,784
61,778
77,127
75,481
121,881
12,692
12,918
14,567
11,905
15,196
$
80,476
$
74,696
$
91,694
$
87,386
$
137,077
$
53,456
$
51,490
$
59,697
$
55,913
$
66,060
0.30
%
0.28
%
0.36
%
0.36
%
0.58
%
0.36
0.34
0.43
0.41
0.65
417
464
383
397
276
351
384
322
343
245
461
515
425
444
304
389
426
357
384
270
0.24
0.24
0.28
0.27
0.31
Three Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
(in thousands)
2004
2004
2004
2003
2003
$
74,696
$
91,694
$
87,386
$
137,077
$
133,722
22,740
25,727
27,208
38,367
52,213
—
(1,493
)
(54
)
(454
)
(319
)
(5,424
)
(12,872
)
(10,463
)
(39,657
)
(22,090
)
(10,202
)
(13,571
)
(10,717
)
(22,710
)
(18,905
)
(1,334
)
(14,789
)
(1,666
)
(25,237
)
(7,544
)
$
80,476
$
74,696
$
91,694
$
87,386
$
137,077
Three Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
(in thousands)
2004
2004
2004
2003
2003
$
286,935
$
295,377
$
299,732
$
336,398
$
307,667
(26,366
)
(30,845
)
(37,167
)
(68,023
)
(43,261
)
9,886
18,330
8,540
12,880
10,487
(16,480
)
(12,515
)
(28,627
)
(55,143
)
(32,774
)
11,785
5,027
25,596
26,341
51,615
1,186
896
3,433
(1,785
)
(457
)
(776
)
(1,850
)
(4,757
)
(6,079
)
10,347
$
282,650
$
286,935
$
295,377
$
299,732
$
336,398
$
31,193
$
32,089
$
35,522
$
33,737
$
33,280
(1,186
)
(896
)
(3,433
)
1,785
457
$
30,007
$
31,193
$
32,089
$
35,522
$
33,737
$
312,657
$
318,128
$
327,466
$
335,254
$
370,135
1.38
%
1.46
%
1.55
%
1.59
%
1.75
%
0.84
%
0.86
%
0.91
%
0.88
%
0.98
%
0.33
0.36
0.38
0.40
0.47
0.08
0.10
0.10
0.14
0.14
1.25
%
1.32
%
1.39
%
1.42
%
1.59
%
-200
-100
+100
+200
-4.0
%
-2.0
%
-2.0
%
-4.0
%
N.M.
-0.5
%
+0.3
%
+0.5
%
N.M.
-0.3
%
-0.0
%
-0.1
%
N.M.
-0.3
%
-0.2
%
-0.5
%
-200
-100
+100
+200
-12.0
%
-5.0
%
-5.0
%
-12.0
%
N.M.
-0.4
%
-1.4
%
-3.9
%
N.M.
+1.5
%
-2.8
%
-6.2
%
N.M.
+1.8
%
-3.5
%
-7.9
%
September 30, 2004
June 30, 2004
March 31, 2004
December 31, 2003
September 30, 2003
(in millions)
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
$
3,264
16.2
%
$
3,327
17.1
%
$
2,918
15.4
%
$
2,987
16.2
%
$
3,003
15.9
%
7,472
37.2
7,124
36.6
6,866
36.2
6,411
34.7
6,425
34.1
2,983
14.8
3,011
15.5
3,002
15.8
2,960
16.0
3,000
15.9
2,441
12.1
2,412
12.4
2,395
12.6
2,462
13.3
2,484
13.2
588
3.0
595
3.1
608
3.2
631
3.4
638
3.4
16,748
83.3
16,470
84.7
15,789
83.2
15,451
83.6
15,550
82.5
998
5.0
808
4.2
791
4.2
789
4.3
844
4.5
1,896
9.4
1,679
8.6
1,942
10.2
1,772
9.6
1,837
9.8
467
2.3
508
2.5
467
2.4
475
2.5
603
3.2
$
20,109
100.0
%
$
19,465
100.0
%
$
18,989
100.0
%
$
18,487
100.0
%
$
18,834
100.0
%
$
4,400
21.9
%
$
4,386
22.5
%
$
4,378
23.1
%
$
4,184
22.6
%
$
4,189
22.3
%
4,015
20.0
3,774
19.4
3,517
18.5
3,505
19.0
3,531
18.8
1,601
8.0
1,559
8.0
1,476
7.8
1,442
7.8
1,437
7.6
2,699
13.4
2,599
13.4
2,609
13.7
2,457
13.3
2,529
13.4
2,169
10.8
2,081
10.7
2,030
10.7
1,988
10.8
2,000
10.6
1,381
6.9
1,369
7.0
1,292
6.8
1,315
7.1
1,324
7.0
666
3.3
668
3.4
637
3.4
648
3.5
661
3.5
16,931
84.2
16,435
84.4
15,939
84.0
15,539
84.1
15,671
83.2
70
0.3
71
0.4
77
0.4
77
0.4
65
0.4
1,125
5.6
1,016
5.2
1,057
5.6
1,164
6.3
1,117
5.9
1,983
9.9
1,943
10.0
1,916
10.0
1,707
9.2
1,981
10.5
$
20,109
100.0
%
$
19,465
100.0
%
$
18,989
100.0
%
$
18,487
100.0
%
$
18,834
100.0
%
(1)
Comprised largely of brokered deposits and negotiable CDs.
(2)
Prior period amounts have been reclassified to conform to the current period business segment structure.
(1)
Following Huntington’s announcement on November 3, 2004, as more
fully described in Note 4 to the Unaudited Condensed Consolidated
Financial Statements, Fitch Ratings revised their outlook for
Huntington to Negative from Stable. Also, Moody’s Investors Service
placed all the ratings of Huntington on review for possible downgrade.
2004
2003
Third
Second
First
Fourth
Third
$
25.150
$
23.120
$
23.780
$
22.550
$
20.890
22.700
20.890
21.000
19.850
19.220
24.910
22.980
22.030
22.500
19.850
24.105
22.050
22.501
21.584
20.199
$
10.69
$
10.40
$
10.31
$
9.93
$
9.79
$
0.200
$
0.175
$
0.175
$
0.175
$
0.175
229,848
229,429
229,227
228,902
228,715
234,348
232,659
232,915
231,986
230,966
230,153
229,476
229,410
229,008
228,870
—
—
—
—
—
(1)
High and low stock prices are intra-day quotes obtained from NASDAQ.
Three Months Ended
September 30
June 30,
March 31
December 31,
September 30,
(in millions)
2004
2004
2004
2003
2003
$
28,773
$
28,413
$
28,236
$
28,164
$
27,949
9.08
%
8.98
%
8.74
%
8.53
%
8.40
%
12.50
12.56
12.38
11.95
11.19
8.36
8.20
8.08
7.98
7.94
7.11
6.95
6.97
6.79
6.77
7.80
7.64
7.61
7.30
7.24
7.66
7.42
7.39
7.32
7.49
2004
2004
2003
3Q04 vs. 3Q03
2004
2003
2004 vs. 2003
Third
Second
Third
Amount
%
9 Months
9 Months
Amount
%
$
163,147
$
155,083
$
160,973
$
2,174
1.4
%
$
469,292
$
457,805
$
11,487
2.5
%
5,086
(3,949
)
32,537
(27,451
)
-84.4
%
3,242
96,615
(93,373
)
-96.6
%
158,061
159,032
128,436
29,625
23.1
%
466,050
361,190
104,860
29.0
%
584
327
—
584
NM
960
—
960
NM
42,923
42,357
41,151
1,772
4.3
%
125,983
119,522
6,461
5.4
%
3,615
4,515
4,199
(584
)
-13.9
%
11,986
12,042
(56
)
-0.5
%
263
225
200
63
31.5
%
780
748
32
4.3
%
8,588
13,227
29,880
(21,292
)
-71.3
%
27,848
47,821
(19,973
)
-41.8
%
10,685
10,529
10,401
284
2.7
%
30,627
31,900
(1,273
)
-4.0
%
10,584
11,295
11,941
(1,357
)
-11.4
%
33,584
29,128
4,456
15.3
%
77,242
82,475
97,772
(20,530
)
-21.0
%
231,768
241,161
(9,393
)
-3.9
%
14
—
—
14
NM
14
—
14
NM
77,256
82,475
97,772
(20,516
)
-21.0
%
231,782
241,161
(9,379
)
-3.9
%
492
275
—
492
NM
811
—
811
NM
65,859
61,728
59,917
5,942
9.9
%
190,743
179,110
11,633
6.5
%
78,072
85,997
81,505
(3,433
)
-4.2
%
247,961
245,935
2,026
0.8
%
144,423
148,000
141,422
3,001
2.1
%
439,515
425,045
14,470
3.4
%
90,894
93,507
84,786
6,108
7.2
%
258,317
177,306
81,011
45.7
%
31,813
32,727
29,675
2,138
7.2
%
90,411
62,057
28,354
45.7
%
$
59,081
$
60,780
$
55,111
$
3,970
7.2
%
$
167,906
$
115,249
$
52,657
45.7
%
$
163,147
$
155,083
$
160,973
$
2,174
1.4
%
$
469,292
$
457,805
$
11,487
2.5
%
258
250
278
(20
)
-7.2
%
757
920
(163
)
-17.7
%
163,405
155,333
161,251
2,154
1.3
%
470,049
458,725
11,324
2.5
%
77,254
82,476
97,772
(20,518
)
-21.0
%
231,781
241,161
(9,380
)
-3.9
%
$
240,659
$
237,809
$
259,023
$
(18,364
)
-7.1
%
$
701,830
$
699,886
$
1,944
0.3
%
$
240,645
$
237,809
$
259,023
$
(18,378
)
-7.1
%
$
701,816
$
699,886
$
1,930
0.3
%
$
4,157
$
4,286
$
4,403
$
(246
)
-5.6
%
$
4,221
$
4,553
$
(332
)
-7.3
%
1,550
1,297
1,223
327
26.7
%
1,380
1,189
191
16.1
%
2,572
2,591
2,451
121
4.9
%
2,577
2,352
225
9.6
%
4
5
6
(2
)
-33.3
%
5
7
(2
)
-28.6
%
3,669
3,535
3,181
488
15.3
%
3,539
3,087
452
14.6
%
3,378
2,809
1,677
1,701
NM
2,841
1,556
1,285
82.6
%
317
295
310
7
2.3
%
301
318
(17
)
-5.3
%
7,368
6,644
5,174
2,194
42.4
%
6,686
4,968
1,718
34.6
%
$
15,647
$
14,818
$
13,251
$
2,396
18.1
%
$
14,864
$
13,062
$
1,802
13.8
%
$
9
$
4
$
—
$
9
NM
$
4
$
—
$
4
NM
$
3,046
$
2,982
$
3,014
$
32
1.1
%
$
2,937
$
2,864
$
73
2.5
%
6,679
6,454
5,825
854
14.7
%
6,330
5,425
905
16.7
%
2,794
2,790
2,752
42
1.5
%
2,786
2,742
44
1.6
%
3,785
3,689
3,925
(140
)
-3.6
%
3,734
4,139
(405
)
-9.8
%
411
420
372
39
10.5
%
417
334
83
24.9
%
$
16,715
$
16,335
$
15,888
$
827
5.2
%
$
16,204
$
15,504
$
700
4.5
%
(1)
Operating basis, see page 52 for definition.
(2)
Calculated assuming a 35% tax rate.
2004
2004
2003
3Q04 vs. 3Q03
2004
2003
2004 vs. 2003
Third
Second
Third
Amount
%
9 Months
9 Months
Amount
%
1.39
%
1.52
%
1.45
%
-0.06
%
1.40
%
1.06
%
0.34
%
22.4
%
23.9
%
21.2
%
1.2
%
21.9
%
15.2
%
6.6
%
4.10
%
4.15
%
4.53
%
-0.43
%
4.16
%
4.48
%
-0.32
%
60.0
%
62.2
%
54.6
%
5.4
%
62.6
%
60.7
%
1.9
%
$
1,085
$
(3,656
)
$
12,099
$
(11,014
)
-91.0
%
$
3,368
$
52,952
$
(49,584
)
-93.6
%
751
941
3,441
(2,690
)
-78.2
%
3,328
4,592
(1,264
)
-27.5
%
1,836
(2,715
)
15,540
(13,704
)
-88.2
%
6,696
57,544
(50,848
)
-88.4
%
(5
)
40
(11
)
6
-54.5
%
14
12
2
16.7
%
3,917
3,019
3,153
764
24.2
%
9,892
10,616
(724
)
-6.8
%
534
302
246
288
NM
1,152
637
515
80.8
%
875
1,196
881
(6
)
-0.7
%
2,849
2,936
(87
)
-3.0
%
5,321
4,557
4,269
1,052
24.6
%
13,907
14,201
(294
)
-2.1
%
$
7,157
$
1,842
$
19,809
$
(12,652
)
-63.9
%
$
20,603
$
71,745
$
(51,142
)
-71.3
%
0.10
%
-0.34
%
1.09
%
-0.99
%
0.11
%
1.55
%
-1.45
%
0.07
%
0.10
%
0.37
%
-0.30
%
0.11
%
0.17
%
-0.06
%
0.09
%
-0.13
%
0.76
%
-0.67
%
0.11
%
0.95
%
-0.84
%
-0.50
%
3.22
%
-0.73
%
0.23
%
0.37
%
0.23
%
0.14
%
0.42
%
0.34
%
0.39
%
0.03
%
0.37
%
0.46
%
-0.09
%
0.06
%
0.04
%
0.06
%
0.00
%
0.05
%
0.05
%
0.00
%
1.10
%
1.63
%
1.13
%
-0.03
%
1.26
%
1.23
%
0.03
%
0.29
%
0.28
%
0.33
%
-0.04
%
0.28
%
0.38
%
-0.10
%
0.18
%
0.05
%
0.59
%
-0.41
%
0.19
%
0.73
%
-0.55
%
$
25
$
30
$
78
$
(53
)
-67.9
%
$
25
$
78
$
(53
)
-67.9
%
11
7
20
(9
)
-45.0
%
11
20
(9
)
-45.0
%
10
11
8
2
25.0
%
10
8
2
25.0
%
8
—
—
8
NM
8
—
8
NM
54
48
106
(52
)
-49.1
%
54
106
(52
)
-49.1
%
—
—
—
—
NM
—
—
—
NM
54
48
106
(52
)
-49.1
%
54
106
(52
)
-49.1
%
14
14
16
(2
)
-12.5
%
14
16
(2
)
-12.5
%
$
68
$
62
$
122
$
(54
)
-44.3
%
$
68
$
122
$
(54
)
-44.3
%
$
41
$
41
$
50
$
(9
)
-18.0
%
$
41
$
50
$
(9
)
-18.0
%
$
185
$
186
$
203
$
(18
)
-8.9
%
$
185
$
203
$
(18
)
-8.9
%
1.16
%
1.22
%
1.49
%
-0.33
%
1.16
%
1.49
%
-0.33
%
342.6
%
387.5
%
191.5
%
151.1
%
342.6
%
191.5
%
151.1
%
292.6
%
322.6
%
179.5
%
113.1
%
292.6
%
179.5
%
113.1
%
0.34
%
0.31
%
0.78
%
-0.44
%
0.34
%
0.78
%
-0.44
%
0.43
%
0.40
%
0.89
%
-0.46
%
0.43
%
0.89
%
-0.46
%
N.M. — Not Meaningful.
eop — End of Period.
2004
2004
2003
3Q04 vs. 3Q03
2004
2003
2004 vs. 2003
Third
Second
Third
Amount
%
9 Months
9 Months
Amount
%
4,824
4,925
4,776
48
1.0
%
4,824
4,776
48
1.0
%
$
4,815
$
4,544
$
3,811
$
1,004
26.3
%
$
4,534
$
3,703
$
831
22.4
%
$
11,138
$
11,025
$
11,074
$
64
0.6
%
$
10,947
$
11,103
$
(156
)
-1.4
%
3,396
3,482
3,328
68
2.0
%
3,396
3,328
68
2.0
%
335
335
332
3
0.9
%
335
332
3
0.9
%
713
700
845
(132
)
-15.6
%
713
845
(132
)
-15.6
%
502,892
494,960
492,585
10,307
2.1
%
502,892
492,585
10,307
2.1
%
2.34
2.17
2.02
0.32
15.8
%
2.24
1.86
0.38
20.4
%
198,875
185,454
151,946
46,929
30.9
%
198,875
151,946
46,929
30.9
%
36
%
35
%
29
%
7
%
36
%
29
%
7
%
$
1,928
$
1,865
$
1,740
$
188
10.8
%
$
1,873
$
1,687
$
186
11.0
%
$
2,036
$
1,980
$
1,731
$
305
17.6
%
$
1,954
$
1,634
$
320
19.6
%
269
260
252
17
6.7
%
269
252
17
6.7
%
65,658
64,558
62,538
3,120
5.0
%
65,658
62,538
3,120
5.0
%
2.22
2.23
1.90
0.32
16.8
%
2.17
1.83
0.34
18.6
%
$
6,412
$
6,377
$
6,412
$
—
0.0
%
$
6,368
$
6,467
$
(99
)
-1.5
%
$
3,378
$
3,110
$
2,793
$
585
20.9
%
$
3,126
$
2,539
$
587
23.1
%
569
574
576
(7
)
-1.2
%
569
576
(7
)
-1.2
%
5,589
5,684
6,897
(1,308
)
-19.0
%
5,589
6,897
(1,308
)
-19.0
%
$
2,492
$
2,032
$
1,288
$
1,204
93.5
%
$
2,089
$
1,205
$
884
73.4
%
$
163
$
220
$
290
$
(127
)
-43.8
%
$
177
$
228
$
(51
)
-22.4
%
590
609
620
(30
)
-4.8
%
590
620
(30
)
-4.8
%
$
1,055
$
1,330
$
2,189
$
(1,134
)
-51.8
%
$
3,245
$
5,158
$
(1,913
)
-37.1
%
$
669
$
863
$
724
$
(55
)
-7.6
%
$
2,065
$
1,454
$
611
42.0
%
$
396
$
502
$
1,765
$
(1,369
)
-77.6
%
$
1,240
$
3,803
$
(2,563
)
-67.4
%
$
10,332
$
9,786
$
8,615
$
1,717
19.9
%
$
10,332
$
8,615
$
1,717
19.9
%
$
6,780
$
6,537
$
6,023
$
757
12.6
%
$
6,780
$
6,023
$
757
12.6
%
$
76.5
$
79.2
$
64.5
$
12.0
18.6
%
$
76.5
$
64.5
$
12.0
18.6
%
N.M. — Not Meaningful.
N/A — Not Available.
eop — End of Period.
2004
2004
2003
3Q04 vs. 3Q03
2004
2003
2004 vs. 2003
Third
Second
Third
Amount
%
9 Months
9 Months
Amount
%
$
37,098
$
37,757
$
29,236
$
7,862
26.9
%
$
109,806
$
72,878
$
36,928
50.7
%
6,100
8,261
16,036
(9,936
)
-62.0
%
36,016
36,612
(596
)
-1.6
%
30,998
29,496
13,200
17,798
NM
73,790
36,266
37,524
NM
63,828
78,379
117,624
(53,796
)
-45.7
%
231,025
384,391
(153,366
)
-39.9
%
198
230
204
(6
)
-2.9
%
627
642
(15
)
-2.3
%
770
335
878
(108
)
-12.3
%
1,615
3,071
(1,456
)
-47.4
%
—
—
7
(7
)
-100.0
%
—
13
(13
)
-100.0
%
—
—
—
—
NM
—
2
(2
)
-100.0
%
—
—
—
—
NM
—
—
—
NM
8,037
9,218
6,823
1,214
17.8
%
24,181
25,485
(1,304
)
-5.1
%
72,833
88,162
125,536
(52,703
)
-42.0
%
257,448
413,604
(156,156
)
-37.8
%
—
469
—
—
NM
469
—
469
NM
72,833
88,631
125,536
(52,703
)
-42.0
%
257,917
413,604
(155,687
)
-37.6
%
54,392
62,288
93,134
(38,742
)
-41.6
%
187,346
307,661
(120,315
)
-39.1
%
5,655
5,666
5,319
336
6.3
%
17,222
15,441
1,781
11.5
%
17,102
17,814
16,553
549
3.3
%
49,718
51,537
(1,819
)
-3.5
%
77,149
85,768
115,006
(37,857
)
-32.9
%
254,286
374,639
(120,353
)
-32.1
%
26,682
32,359
23,730
2,952
12.4
%
77,421
75,231
2,190
2.9
%
9,339
11,326
8,306
1,033
12.4
%
27,098
26,332
766
2.9
%
$
17,343
$
21,033
$
15,424
$
1,919
12.4
%
$
50,323
$
48,899
$
1,424
2.9
%
$
37,098
$
37,757
$
29,236
$
7,862
26.9
%
$
109,806
$
72,878
$
36,928
50.7
%
—
—
—
—
NM
—
—
—
NM
37,098
37,757
29,236
7,862
26.9
%
109,806
72,878
36,928
50.7
%
72,833
88,631
125,536
(52,703
)
-42.0
%
257,917
413,604
(155,687
)
-37.6
%
$
109,931
$
126,388
$
154,772
$
(44,841
)
-29.0
%
$
367,723
$
486,482
$
(118,759
)
-24.4
%
$
109,931
$
125,919
$
154,772
$
(44,841
)
-29.0
%
$
367,254
$
486,482
$
(119,228
)
-24.5
%
$
722
$
809
$
611
$
111
18.2
%
$
762
$
644
$
118
18.3
%
4
3
11
(7
)
-63.6
%
5
6
(1
)
-16.7
%
74
79
68
6
8.8
%
78
64
14
21.9
%
2,250
2,139
1,590
660
41.5
%
2,126
1,304
822
63.0
%
1,853
2,332
3,588
(1,735
)
-48.4
%
2,405
3,163
(758
)
-24.0
%
0
0
0
0
NM
0
0
0
NM
79
74
63
16
25.4
%
74
58
16
27.6
%
4,182
4,545
5,241
(1,059
)
-20.2
%
4,605
4,525
80
1.8
%
$
4,982
$
5,436
$
5,931
$
(949
)
-16.0
%
$
5,450
$
5,239
$
211
4.0
%
$
791
$
973
$
1,565
$
(774
)
-49.5
%
$
976
$
1,812
$
(836
)
-46.1
%
$
66
$
67
$
59
$
7
11.9
%
$
66
$
56
$
10
17.9
%
2
2
2
0
0.0
%
2
1
1
100.0
%
4
4
7
(3
)
-42.9
%
4
5
(1
)
-20.0
%
$
72
$
73
$
68
$
4
5.9
%
$
72
$
62
$
10
16.1
%
2004
2004
2003
3Q04 vs. 3Q03
2004
2003
2004 vs. 2003
Third
Second
Third
Amount
%
9 Months
9 Months
Amount
%
1.14
%
1.27
%
0.79
%
0.35
%
1.01
%
0.89
%
0.12
%
17.8
%
20.5
%
14.0
%
3.8
%
16.2
%
14.9
%
1.3
%
2.90
%
2.77
%
1.96
%
0.94
%
2.67
%
1.83
%
0.83
%
70.2
%
68.1
%
74.3
%
-4.1
%
69.2
%
77.0
%
-7.8
%
$
(38
)
$
36
$
—
$
(38
)
NM
$
(1
)
$
(38
)
$
37
-97.4
%
—
—
—
—
NM
—
—
—
NM
(38
)
36
—
(38
)
NM
(1
)
(38
)
37
-97.4
%
2,415
2,159
1,450
965
66.6
%
7,733
3,792
3,941
NM
5,147
5,564
10,784
(5,637
)
-52.3
%
24,154
28,908
(4,754
)
-16.4
%
—
—
36
(36
)
-100.0
%
—
36
(36
)
-100.0
%
309
38
82
227
NM
558
657
(99
)
-15.1
%
7,871
7,761
12,352
(4,481
)
-36.3
%
32,445
33,393
(948
)
-2.8
%
$
7,833
$
7,797
$
12,352
$
(4,519
)
-36.6
%
$
32,444
$
33,355
$
(911
)
-2.7
%
-0.02
%
0.02
%
0.00
%
-0.02
%
0.00
%
-0.01
%
0.01
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
-0.02
%
0.02
%
0.00
%
-0.02
%
0.00
%
-0.01
%
0.01
%
0.43
%
0.41
%
0.36
%
0.07
%
0.49
%
0.39
%
0.10
%
1.11
%
0.96
%
1.19
%
-0.08
%
1.34
%
1.22
%
0.12
%
NM
NM
NM
NM
NM
NM
NM
1.56
%
0.21
%
0.52
%
1.04
%
1.01
%
1.51
%
-0.51
%
0.75
%
0.69
%
0.94
%
-0.19
%
0.94
%
0.99
%
-0.05
%
0.63
%
0.58
%
0.83
%
-0.20
%
0.80
%
0.85
%
-0.06
%
$
—
$
—
$
—
$
—
NM
$
—
$
—
$
—
NM
—
—
—
—
NM
—
—
—
NM
0
0
0
0
NM
0
0
0
NM
—
—
—
—
NM
—
—
—
NM
0
0
0
—
NM
0
0
—
NM
—
—
—
—
NM
—
—
—
NM
$
—
$
—
$
—
$
—
NM
$
—
$
—
$
—
NM
$
10
$
8
$
14
$
(4
)
-28.6
%
$
10
$
14
$
(4
)
-28.6
%
$
48
$
50
$
67
$
(19
)
-28.4
%
$
48
$
67
$
(19
)
-28.4
%
0.95
%
1.01
%
1.09
%
-0.14
%
0.95
%
1.09
%
-0.14
%
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
2004
2004
2003
3Q04 vs. 3Q03
2004
2003
2004 vs. 2003
Third
Second
Third
Amount
%
9 Months
9 Months
Amount
%
407
410
454
(47
)
-10.4
%
407
454
(47
)
-10.4
%
$
361.7
$
431.2
$
739.4
(378
)
-51.1
%
$
1,280.8
$
2,094.9
(814
)
-38.9
%
47.2
%
52.0
%
63.8
%
-16.6
%
50.9
%
57.2
%
-6.3
%
65.1
65.1
64.3
0.8
64.9
64.2
0.7
$
267.9
$
246.4
$
309.4
(42
)
-13.4
%
$
789.7
$
1,008.3
(219
)
-21.7
%
99.3
%
99.1
%
99.3
%
0.0
%
99.1
%
96.8
%
2.3
%
54.3
54.6
52.7
1.6
54.1
52.9
1.2
41.9
%
41.0
%
43.0
%
-1.1
%
41.8
%
42.9
%
-1.2
%
2004
2004
2003
3Q04 vs. 3Q03
2004
2003
2004 vs. 2003
Third
Second
Third
Amount
%
9 Months
9 Months
Amount
%
$
11,715
$
11,166
$
11,085
$
630
5.7
%
$
34,010
$
30,365
$
3,645
12.0
%
72
654
2,415
(2,343
)
-97.0
%
169
3,858
(3,689
)
-95.6
%
11,643
10,512
8,670
2,973
34.3
%
33,841
26,507
7,334
27.7
%
994
1,002
929
65
7.0
%
2,921
2,881
40
1.4
%
8,679
8,488
8,529
150
1.8
%
27,783
27,747
36
0.1
%
16,801
16,483
15,158
1,643
10.8
%
49,315
45,095
4,220
9.4
%
(175
)
(104
)
313
(488
)
NM
(408
)
680
(1,088
)
NM
114
116
98
16
16.3
%
330
309
21
6.8
%
1,124
1,445
759
365
48.1
%
3,653
4,128
(475
)
-11.5
%
27,537
27,430
25,786
1,751
6.8
%
83,594
80,840
2,754
3.4
%
51
250
29
22
75.9
%
301
38
263
NM
27,588
27,680
25,815
1,773
6.9
%
83,895
80,878
3,017
3.7
%
16,535
17,047
14,924
1,611
10.8
%
51,382
45,642
5,740
12.6
%
10,548
11,512
11,168
(620
)
-5.6
%
33,721
32,971
750
2.3
%
27,083
28,559
26,092
991
3.8
%
85,103
78,613
6,490
8.3
%
12,148
9,633
8,393
3,755
44.7
%
32,633
28,772
3,861
13.4
%
4,252
3,372
2,938
1,314
44.7
%
11,422
10,071
1,351
13.4
%
$
7,896
$
6,261
$
5,455
$
2,441
44.7
%
$
21,211
$
18,701
$
2,510
13.4
%
$
11,715
$
11,166
$
11,085
$
630
5.7
%
$
34,010
$
30,365
$
3,645
12.0
%
9
9
10
(1
)
-10.0
%
27
35
(8
)
-22.9
%
11,724
11,175
11,095
629
5.7
%
34,037
30,400
3,637
12.0
%
27,588
27,680
25,815
1,773
6.9
%
83,895
80,878
3,017
3.7
%
$
39,312
$
38,855
$
36,910
$
2,402
6.5
%
$
117,932
$
111,278
$
6,654
6.0
%
$
39,261
$
38,605
$
36,881
$
2,380
6.5
%
$
117,631
$
111,240
$
6,391
5.7
%
$
354
$
339
$
313
$
41
13.1
%
$
338
$
315
$
23
7.3
%
23
20
23
0
0.0
%
22
21
1
4.8
%
184
177
160
24
15.0
%
176
157
19
12.1
%
301
289
262
39
14.9
%
291
250
41
16.4
%
528
517
445
83
18.7
%
520
402
118
29.4
%
10
8
8
2
25.0
%
9
7
2
28.6
%
839
814
715
124
17.3
%
820
659
161
24.4
%
$
1,400
$
1,350
$
1,211
$
189
15.6
%
$
1,356
$
1,152
$
204
17.7
%
$
164
$
174
$
145
$
19
13.1
%
$
169
$
143
$
26
18.2
%
703
712
731
(28
)
-3.8
%
723
674
49
7.3
%
47
49
56
(9
)
-16.1
%
47
53
(6
)
-11.3
%
110
106
95
15
15.8
%
104
97
7
7.2
%
23
21
21
2
9.5
%
22
16
6
37.5
%
$
1,047
$
1,062
$
1,048
$
(1
)
-0.1
%
$
1,065
$
983
$
82
8.3
%
2004
2004
2003
3Q04 vs. 3Q03
2004
2003
2004 vs. 2003
Third
Second
Third
Amount
%
9 Months
9 Months
Amount
%
2.01
%
1.67
%
1.59
%
0.42
%
1.87
%
1.92
%
-0.05
%
26.8
%
21.3
%
19.9
%
6.9
%
24.2
%
24.3
%
-0.1
%
3.16
%
3.14
%
3.44
%
-0.28
%
3.18
%
3.33
%
-0.15
%
69.0
%
74.0
%
70.7
%
-1.7
%
72.3
%
70.7
%
1.7
%
$
(75
)
$
840
$
246
$
(321
)
NM
$
781
$
881
$
(100
)
-11.4
%
—
—
180
(180
)
-100.0
%
—
182
(182
)
-100.0
%
(75
)
840
426
(501
)
NM
781
1,063
(282
)
-26.5
%
610
—
227
383
NM
770
488
282
57.8
%
—
—
—
—
NM
—
21
(21
)
-100.0
%
114
60
83
31
37.3
%
206
117
89
76.1
%
724
60
310
414
NM
976
626
350
55.9
%
$
649
$
900
$
736
$
(87
)
-11.8
%
$
1,757
$
1,689
$
68
4.0
%
-0.08
%
1.00
%
0.31
%
-0.39
%
0.31
%
0.37
%
-0.07
%
0.00
%
0.00
%
0.39
%
-0.39
%
0.00
%
0.14
%
-0.14
%
-0.05
%
0.63
%
0.34
%
-0.39
%
0.19
%
0.29
%
-0.09
%
0.00
%
0.00
%
0.81
%
0.00
%
0.34
%
0.47
%
0.35
%
0.26
%
0.09
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.01
%
-0.01
%
4.54
%
3.02
%
4.12
%
0.42
%
3.06
%
2.23
%
0.82
%
0.34
%
0.03
%
0.17
%
0.17
%
0.16
%
0.13
%
0.03
%
0.18
%
0.27
%
0.24
%
-0.06
%
0.17
%
0.20
%
-0.02
%
$
1
$
2
$
4
$
(3
)
-75.0
%
$
1
$
4
$
(3
)
-75.0
%
1
1
1
—
0.0
%
1
1
—
0.0
%
3
3
1
2
NM
3
1
2
NM
—
—
—
—
NM
—
—
—
NM
5
6
6
(1
)
-16.7
%
5
6
(1
)
-16.7
%
—
—
—
—
NM
—
—
—
NM
5
6
6
(1
)
-16.7
%
5
6
(1
)
-16.7
%
—
—
—
—
NM
—
—
—
NM
$
5
$
6
$
6
$
(1
)
-16.7
%
$
5
$
6
$
(1
)
-16.7
%
$
2
$
2
$
2
$
—
0.0
%
$
2
$
2
$
—
0.0
%
$
8
$
9
$
8
$
—
0.0
%
$
8
$
8
$
—
0.0
%
0.57
%
0.65
%
0.64
%
-0.07
%
0.57
%
0.64
%
-0.07
%
160.0
%
150.0
%
133.3
%
26.7
%
160.0
%
133.3
%
26.7
%
160.0
%
150.0
%
133.3
%
26.7
%
160.0
%
133.3
%
26.7
%
0.36
%
0.43
%
0.48
%
-0.12
%
0.36
%
0.48
%
-0.12
%
0.36
%
0.43
%
0.48
%
-0.12
%
0.36
%
0.48
%
-0.12
%
2004
2004
2003
3Q04 vs. 3Q03
2004
2003
2004 vs. 2003
Third
Second
Third
Amount
%
9 Months
9 Months
Amount
%
702
707
680
22
3.2
%
702
680
22
3.2
%
684
698
693
(9
)
-1.3
%
684
693
(9
)
-1.3
%
$
1,065
$
1,355
$
1,122
$
(57
)
-5.1
%
$
4,030
$
3,076
$
954
31.0
%
6,663
6,776
6,097
566
9.3
%
21,668
21,404
264
1.2
%
555
600
485
70
14.4
%
1,690
1,565
125
8.0
%
1,149
1,280
1,003
146
14.6
%
3,719
3,055
664
21.7
%
9,432
10,011
8,707
725
8.3
%
31,107
29,100
2,007
6.9
%
—
—
—
—
NM
—
—
—
NM
2,648
2,782
4,184
(1,536
)
-36.7
%
8,366
11,610
(3,244
)
-27.9
%
$
12,080
$
12,793
$
12,891
$
(811
)
-6.3
%
$
39,473
$
40,710
$
(1,237
)
-3.0
%
3,401
4,305
4,362
(961
)
-22.0
%
11,690
12,963
(1,273
)
-9.8
%
$
8,679
$
8,488
$
8,529
$
150
1.8
%
$
27,783
$
27,747
$
36
0.1
%
$
30,369
$
58,002
$
48,586
(18,217
)
-37.5
%
$
131,336
$
176,849
(45,513
)
-25.7
%
135,415
133,408
131,589
3,826
2.9
%
430,155
447,807
(17,652
)
-3.9
%
$
8,473
$
8,423
$
7,688
$
785
10.2
%
$
25,087
$
22,619
$
2,468
10.9
%
5,522
5,195
4,821
701
14.5
%
15,947
14,301
1,646
11.5
%
2,239
2,176
1,898
341
18.0
%
6,585
5,841
744
12.7
%
804
900
929
(125
)
-13.5
%
2,412
3,006
(594
)
-19.8
%
—
—
—
—
NM
—
—
—
NM
$
17,038
$
16,694
$
15,336
$
1,702
11.1
%
$
50,031
$
45,767
$
4,264
9.3
%
237
211
178
59
33.1
%
716
672
44
6.5
%
$
16,801
$
16,483
$
15,158
$
1,643
10.8
%
$
49,315
$
45,095
$
4,220
9.4
%
$
5.2
$
5.2
$
4.6
$
0.6
13.0
%
$
5.2
$
4.6
$
0.6
13.0
%
3.1
2.9
2.9
0.2
6.9
%
3.1
2.9
0.2
6.9
%
0.7
0.5
0.5
0.2
40.0
%
0.7
0.5
0.2
40.0
%
—
0.0
0.1
(0.1
)
-100.0
%
—
0.1
(0.1
)
-100.0
%
0.6
0.6
0.5
0.1
20.0
%
0.6
0.5
0.1
20.0
%
—
—
—
—
NM
—
—
—
NM
$
9.6
$
9.3
$
8.6
$
1.0
11.6
%
$
9.6
$
8.6
$
1.0
11.6
%
$
8.7
$
8.9
$
7.8
$
0.9
11.5
%
$
8.7
$
7.8
$
0.9
11.5
%
3.1
2.9
2.9
0.2
6.9
%
3.1
2.9
0.2
6.9
%
26.0
23.9
21.2
4.8
22.6
%
26.0
21.2
4.8
22.6
%
3.4
3.5
3.3
0.1
3.0
%
3.4
3.3
0.1
3.0
%
$
41.2
$
39.2
$
35.2
$
6.0
17.0
%
$
41.2
$
35.2
$
6.0
17.0
%
29
29
24
5
29
24
5
5.0
%
5.9
%
5.6
%
-0.6
%
5.8
%
6.5
%
-0.7
%
$
3,136
$
3,270
$
3,095
$
41
1.3
%
$
3,473
$
3,322
$
151
4.5
%
1,084
987
1,033
51
4.9
%
1,143
1,198
(55
)
-4.6
%
65,041
70,030
66,663
(1,622
)
-2.4
%
71,816
69,395
2,421
3.5
%
3,442
3,319
2,878
564
19.6
%
3,432
3,096
336
10.9
%
(1)
Operating basis, see page 52 for definition.
(3)
Includes variable annuity funds.
(4)
Sales (dollars invested) of mutual funds and annuities divided by bank’s retail deposits.
(5)
Investment program revenue per million of the bank’s retail deposits.
(6)
Contribution of investment program to pretax profit per million of the bank’s retail deposits.
Contribution is difference between program revenue and program expenses.
2004
2004
2003
3Q04 vs. 3Q03
2004
2003
2004 vs. 2003
Third
Second
Third
Amount
%
9 Months
9 Months
Amount
%
$
15,098
$
18,557
$
19,177
$
(4,079
)
-21.3
%
$
59,198
$
63,623
$
(4,425
)
-7.0
%
527
61
627
(100
)
-15.9
%
2,981
567
2,414
NM
14,571
18,496
18,550
(3,979
)
-21.5
%
56,217
63,056
(6,839
)
-10.8
%
(180
)
7
10
(190
)
NM
(163
)
32
(195
)
NM
136
185
201
(65
)
-32.3
%
536
640
(104
)
-16.3
%
(3,965
)
10,199
—
(3,965
)
NM
(3,966
)
—
(3,966
)
NM
10,019
11,309
10,438
(419
)
-4.0
%
31,813
32,618
(805
)
-2.5
%
(1,846
)
2,701
4,020
(5,866
)
NM
6,759
12,907
(6,148
)
-47.6
%
4,164
24,401
14,669
(10,505
)
-71.6
%
34,979
46,197
(11,218
)
-24.3
%
7,738
(9,949
)
(4,136
)
11,874
NM
12,879
3,940
8,939
NM
11,902
14,452
10,533
1,369
13.0
%
47,858
50,137
(2,279
)
-4.5
%
25,919
19,826
17,662
8,257
46.8
%
63,477
40,712
22,765
55.9
%
554
13,122
11,421
(10,867
)
-95.1
%
40,598
72,481
(31,883
)
-44.0
%
(7,661
)
(5,753
)
(8,278
)
617
-7.5
%
(17,766
)
(9,036
)
(8,730
)
96.6
%
$
8,215
$
18,875
$
19,699
$
(11,484
)
-58.3
%
$
58,364
$
81,517
$
(23,153
)
-28.4
%
$
15,098
$
18,557
$
19,177
$
(4,079
)
-21.3
%
$
59,198
$
63,623
$
(4,425
)
-7.0
%
2,597
2,660
2,270
327
14.4
%
8,022
5,775
2,247
38.9
%
17,695
21,217
21,447
(3,752
)
-17.5
%
67,220
69,398
(2,178
)
-3.1
%
11,904
14,451
10,533
1,371
13.0
%
47,859
50,137
(2,278
)
-4.5
%
$
29,599
$
35,668
$
31,980
$
(2,381
)
-7.4
%
$
115,079
$
119,535
$
(4,456
)
-3.7
%
$
21,861
$
45,617
$
36,116
$
(14,255
)
-39.5
%
$
102,200
$
115,595
$
(13,395
)
-11.6
%
$
4,710
$
5,233
$
3,963
$
747
18.9
%
$
4,994
$
3,530
$
1,464
41.5
%
$
106
$
102
$
53
$
53
100.0
%
$
92
$
30
$
62
NM
0
2
1
(1
)
-100.0
%
1
13
(12
)
-92.3
%
60
59
65
(5
)
-7.7
%
60
71
(11
)
-15.5
%
$
166
$
163
$
119
$
47
39.5
%
$
153
$
114
$
39
34.2
%
1,755
1,737
1,421
334
23.5
%
1,800
1,274
526
41.3
%
38
97
136
(98
)
-72.1
%
79
137
(58
)
-42.3
%
$
1,793
$
1,834
$
1,557
$
236
15.2
%
$
1,879
$
1,411
$
468
33.2
%
(1)
Operating basis, see page 52 for definition.
(2)
Reconciling difference between company’s
actual effective tax rate and 35% tax rate
allocated to each business segment.
2004
2004
2003
3Q04 vs. 3Q03
2004
2003
2004 vs. 2003
Third
Second
Third
Amount
%
9 Months
9 Months
Amount
%
0.47
%
1.07
%
1.38
%
-0.91
%
1.13
%
2.08
%
-0.96
%
3.8
%
9.9
%
11.8
%
-8.0
%
10.0
%
17.3
%
-7.3
%
1.32
%
1.53
%
1.99
%
-0.67
%
1.66
%
2.44
%
-0.78
%
NM
43.5
%
48.9
%
NM
62.1
%
35.2
%
26.9
%
$
—
$
(23
)
$
(123
)
$
123
-100.0
%
$
(23
)
$
(123
)
$
100
-81.3
%
841
1,999
—
841
NM
2,841
—
2,841
NM
841
1,976
(123
)
964
NM
2,818
(123
)
2,941
NM
$
841
$
1,976
$
(123
)
$
964
NM
$
2,818
$
(123
)
$
2,941
NM
0.00
%
-0.09
%
-0.92
%
0.92
%
-0.03
%
-0.55
%
0.51
%
5.58
%
13.18
%
0.00
%
5.58
%
6.22
%
0.00
%
6.22
%
2.02
%
4.88
%
-0.41
%
2.43
%
2.46
%
-0.14
%
2.60
%
2.02
%
4.88
%
-0.41
%
2.43
%
2.46
%
-0.14
%
2.60
%
$
1
$
—
$
—
$
1
NM
$
1
$
—
$
1
NM
8
8
10
(2
)
-20.0
%
8
10
(2
)
-20.0
%
9
8
10
(1
)
-10.0
%
9
10
(1
)
-10.0
%
—
—
—
—
NM
—
—
—
NM
9
8
10
(1
)
-10.0
%
9
10
(1
)
-10.0
%
(2
)
(1
)
(1
)
(1
)
100.0
%
(2
)
(1
)
(1
)
100.0
%
$
7
$
7
$
9
$
(2
)
-22.2
%
$
7
$
9
$
(2
)
-22.2
%
$
—
$
—
$
—
$
—
NM
$
—
$
—
$
—
NM
$
42
$
42
$
58
$
(16
)
-27.6
%
$
42
$
58
$
(16
)
-27.6
%
20.69
%
29.79
%
34.94
%
-14.25
%
20.69
%
34.94
%
-14.25
%
466.7
%
NM
NM
NM
466.7
%
NM
NM
NM
NM
NM
NM
NM
NM
NM
4.43
%
5.67
%
6.02
%
-1.59
%
4.43
%
6.02
%
-1.59
%
3.48
%
5.00
%
5.45
%
-1.97
%
3.48
%
5.45
%
-1.97
%
1,973
2,003
1,996
(23
)
-1.2
%
1,973
1,996
(23
)
-1.2
%
2004
2004
2003
3Q04 vs. 3Q03
2004
2003
2004 vs. 2003
Third
Second
Third
Amount
%
9 Months
9 Months
Amount
%
$
227,058
$
222,563
$
220,471
$
6,587
3.0
%
$
672,306
$
624,671
$
47,635
7.6
%
11,785
5,027
51,615
(39,830
)
-77.2
%
42,408
137,652
(95,244
)
-69.2
%
215,273
217,536
168,856
46,417
27.5
%
629,898
487,019
142,879
29.3
%
64,412
78,706
117,624
(53,212
)
-45.2
%
231,985
384,391
(152,406
)
-39.6
%
43,935
43,596
42,294
1,641
3.9
%
129,368
123,077
6,291
5.1
%
13,200
13,523
13,807
(607
)
-4.4
%
41,920
43,500
(1,580
)
-3.6
%
17,064
16,708
15,365
1,699
11.1
%
50,095
45,856
4,239
9.2
%
4,448
23,322
30,193
(25,745
)
-85.3
%
23,474
48,503
(25,029
)
-51.6
%
10,019
11,309
10,438
(419
)
-4.0
%
31,813
32,618
(805
)
-2.5
%
10,799
10,645
10,499
300
2.9
%
30,957
32,209
(1,252
)
-3.9
%
17,899
24,659
23,543
(5,644
)
-24.0
%
68,177
71,648
(3,471
)
-4.8
%
181,776
222,468
263,763
(81,987
)
-31.1
%
607,789
781,802
(174,013
)
-22.3
%
7,803
(9,230
)
(4,107
)
11,910
NM
13,663
3,978
9,685
NM
189,579
213,238
259,656
(70,077
)
-27.0
%
621,452
785,780
(164,328
)
-20.9
%
54,885
62,563
93,134
(38,249
)
-41.1
%
188,158
307,661
(119,503
)
-38.8
%
121,729
119,715
113,170
8,559
7.6
%
363,068
331,501
31,567
9.5
%
97,960
99,875
93,878
4,082
4.3
%
291,155
279,847
11,308
4.0
%
274,574
282,153
300,182
(25,608
)
-8.5
%
842,381
919,009
(76,628
)
-8.3
%
130,278
148,621
128,330
1,948
1.5
%
408,969
353,790
55,179
15.6
%
37,743
41,672
32,641
5,102
15.6
%
111,165
89,424
21,741
24.3
%
$
92,535
$
106,949
$
95,689
$
(3,154
)
-3.3
%
$
297,804
$
264,366
$
33,438
12.6
%
$
227,058
$
222,563
$
220,471
$
6,587
3.0
%
$
672,306
$
624,671
$
47,635
7.6
%
2,864
2,919
2,558
306
12.0
%
8,806
6,730
2,076
30.8
%
229,922
225,482
223,029
6,893
3.1
%
681,112
631,401
49,711
7.9
%
189,579
213,238
259,656
(70,077
)
-27.0
%
621,452
785,780
(164,328
)
-20.9
%
$
419,501
$
438,720
$
482,685
$
(63,184
)
-13.1
%
$
1,302,564
$
1,417,181
$
(114,617
)
-8.1
%
$
411,698
$
447,950
$
486,792
$
(75,094
)
-15.4
%
$
1,288,901
$
1,413,203
$
(124,302
)
-8.8
%
$
5,339
$
5,536
$
5,380
$
(41
)
-0.8
%
$
5,413
$
5,542
$
(129
)
-2.3
%
1,577
1,322
1,258
319
25.4
%
1,408
1,229
179
14.6
%
2,890
2,906
2,744
146
5.3
%
2,891
2,644
247
9.3
%
2,250
2,139
1,590
660
41.5
%
2,126
1,304
822
63.0
%
1,857
2,337
3,594
(1,737
)
-48.3
%
2,410
3,170
(760
)
-24.0
%
3,970
3,824
3,443
527
15.3
%
3,830
3,337
493
14.8
%
3,906
3,326
2,122
1,784
84.1
%
3,361
1,958
1,403
71.7
%
406
377
381
25
6.6
%
384
383
1
0.3
%
12,389
12,003
11,130
1,259
11.3
%
12,111
10,152
1,959
19.3
%
$
22,195
$
21,767
$
20,512
$
1,683
8.2
%
$
21,823
$
19,567
$
2,256
11.5
%
$
800
$
977
$
1,565
$
(765
)
-48.9
%
$
980
$
1,812
$
(832
)
-45.9
%
$
3,276
$
3,223
$
3,218
$
58
1.8
%
$
3,172
$
3,063
$
109
3.6
%
7,384
7,168
6,558
826
12.6
%
7,055
6,100
955
15.7
%
2,841
2,839
2,808
33
1.2
%
2,833
2,795
38
1.4
%
3,895
3,795
4,020
(125
)
-3.1
%
3,838
4,236
(398
)
-9.4
%
1,755
1,737
1,421
334
23.5
%
1,800
1,274
526
41.3
%
476
542
536
(60
)
-11.2
%
522
492
30
6.1
%
$
19,627
$
19,304
$
18,561
$
1,066
5.7
%
$
19,220
$
17,960
$
1,260
7.0
%
2004
2004
2003
3Q04 vs. 3Q03
2004
2003
2004 vs. 2003
Third
Second
Third
Amount
%
9 Months
9 Months
Amount
%
1.17
%
1.37
%
1.27
%
-0.10
%
1.28
%
1.24
%
0.03
%
15.3
%
18.5
%
17.0
%
-1.7
%
17.0
%
16.2
%
0.8
%
3.30
%
3.29
%
3.46
%
-0.16
%
3.31
%
3.52
%
-0.22
%
66.7
%
63.0
%
61.7
%
5.0
%
65.4
%
65.0
%
0.3
%
$
972
$
(2,803
)
$
12,222
$
(11,250
)
-92.0
%
$
4,125
$
53,672
$
(49,547
)
-92.3
%
1,592
2,940
3,621
(2,029
)
-56.0
%
6,169
4,774
1,395
29.2
%
2,564
137
15,843
(13,279
)
-83.8
%
10,294
58,446
(48,152
)
-82.4
%
2,415
2,159
1,450
965
66.6
%
7,733
3,792
3,941
NM
5,142
5,604
10,773
(5,631
)
-52.3
%
24,168
28,920
(4,752
)
-16.4
%
4,527
3,019
3,416
1,111
32.5
%
10,662
11,140
(478
)
-4.3
%
534
302
246
288
NM
1,152
658
494
75.1
%
1,298
1,294
1,046
252
24.1
%
3,613
3,710
(97
)
-2.6
%
13,916
12,378
16,931
(3,015
)
-17.8
%
47,328
48,220
(892
)
-1.8
%
$
16,480
$
12,515
$
32,774
$
(16,294
)
-49.7
%
$
57,622
$
106,666
$
(49,044
)
-46.0
%
0.07
%
-0.20
%
0.91
%
-0.84
%
0.10
%
1.29
%
-1.19
%
0.14
%
0.28
%
0.36
%
-0.22
%
0.19
%
0.16
%
0.03
%
0.10
%
0.01
%
0.68
%
-0.58
%
0.14
%
0.83
%
-0.69
%
0.43
%
0.40
%
0.36
%
0.07
%
0.49
%
0.39
%
0.10
%
1.11
%
0.96
%
1.20
%
-0.09
%
1.34
%
1.22
%
0.12
%
0.46
%
0.32
%
0.40
%
0.06
%
0.37
%
0.45
%
-0.07
%
0.05
%
0.04
%
0.05
%
0.00
%
0.05
%
0.04
%
0.00
%
1.28
%
1.38
%
1.10
%
0.18
%
1.26
%
1.29
%
-0.03
%
0.45
%
0.41
%
0.61
%
-0.16
%
0.52
%
0.63
%
-0.10
%
0.30
%
0.23
%
0.64
%
-0.34
%
0.35
%
0.73
%
-0.38
%
$
27
$
32
$
82
$
(55
)
-67.1
%
$
27
$
82
$
(55
)
-67.1
%
20
16
31
(11
)
-35.5
%
20
31
(11
)
-35.5
%
13
14
9
4
44.4
%
13
9
4
44.4
%
8
—
—
8
NM
8
—
8
NM
68
62
122
(54
)
-44.3
%
68
122
(54
)
-44.3
%
—
—
—
—
NM
—
—
—
NM
68
62
122
(54
)
-44.3
%
68
122
(54
)
-44.3
%
12
13
15
(3
)
-20.0
%
12
15
(3
)
-20.0
%
$
80
$
75
$
137
$
(57
)
-41.6
%
$
80
$
137
$
(57
)
-41.6
%
$
53
$
51
$
66
$
(13
)
-19.7
%
$
53
$
66
$
(13
)
-19.7
%
$
283
$
287
$
336
$
(53
)
-15.8
%
$
283
$
336
$
(53
)
-15.8
%
1.25
%
1.32
%
1.59
%
-0.34
%
1.25
%
1.59
%
-0.34
%
417.0
%
464.5
%
276.0
%
141.0
%
417.0
%
276.0
%
141.0
%
368.7
%
400.0
%
256.2
%
112.5
%
368.7
%
256.2
%
112.5
%
0.30
%
0.28
%
0.58
%
-0.28
%
0.30
%
0.58
%
-0.28
%
0.36
%
0.34
%
0.65
%
-0.29
%
0.36
%
0.65
%
-0.29
%
7,906
8,045
7,906
0
0.0
%
7,906
7,906
0
0.0
%
Articles of Restatement of Charter, Articles of Amendment to
Articles of Restatement of Charter, and Articles Supplementary —
previously filed as Exhibit 3(i) to Annual Report on Form 10-K for the
year ended December 31, 1993, and incorporated herein by reference.
Articles of Amendment to Articles of Restatement of Charter —
previously filed as Exhibit 3(i)(c) to Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998, and incorporated herein by
reference.
Amended and Restated Bylaws as of July 16, 2002 – previously filed
as Exhibit 3(ii) to Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002, and incorporated herein by reference.
Instruments defining the Rights of Security Holders — reference
is made to Articles Fifth, Eighth, and Tenth of Articles of Restatement
of Charter, as amended and supplemented. Instruments defining the
rights of holders of long-term debt will be furnished to the Securities
and Exchange Commission upon request.
Rights Plan, dated February 22, 1990, between Huntington Bancshares
Incorporated and The Huntington National Bank (as successor to The
Huntington Trust Company, National Association) — previously filed as
Exhibit 1 to Registration Statement on Form 8-A, filed with the
Securities and Exchange Commission on February 22, 1990, and
incorporated herein by reference.
(b)
Reports on Form 8-K
1.
A report on Form 8-K, dated July 16, 2004, was filed under report
item numbers 5, 7, and 12, concerning Huntington’s results of
operations for the second quarter ended June 30, 2004.
2.
A report on Form 8-K, dated August 9, 2004, was filed under report
item number 5, announcing ongoing negotiations with the Securities and
Exchange Commission (SEC) regarding a settlement of the previously
announced formal investigation by the SEC into certain financial
accounting matters relating to fiscal years 2002 and earlier, and
certain related disclosure matters.
Date: November 4, 2004
/s/ Thomas E. Hoaglin
Thomas E. Hoaglin
Chairman, Chief Executive Officer and
President
Date: November 4, 2004
/s/ Donald R. Kimble
Donald R. Kimble
Chief Financial Officer and Controller
Exhibit 10(a)
Tier III
EXECUTIVE AGREEMENT
This is an Agreement between Huntington Bancshares Incorporated, a Maryland corporation (the “Corporation”), with its principal office located at the Huntington Center, 41 South High Street, Columbus, Ohio 43287, and (the “Executive”), which shall be effective as of (the “Effective Date”).
Recitals:
The Corporation considers the establishment and maintenance of a sound and vital management to be part of its overall corporate strategy and to be essential to protecting and enhancing the interests of the Corporation and its shareholders. As part of this corporate strategy, the Corporation wishes to act to retain its well-qualified executive officers notwithstanding any actual or threatened change in control of the Corporation.
The Executive is a key executive officer of the Corporation and the Executive’s services, experience and knowledge of the affairs of the Corporation, and reputation and contacts in the industry are extremely valuable to the Corporation. The Executive’s continued dedication, availability, advice, and counsel to the Corporation are deemed important to the Corporation, its Board of Directors (the “Board”), and its shareholders. It is, therefore, in the best interests of the Corporation to secure the continued services of the Executive notwithstanding any actual or threatened change in control of the Corporation. Accordingly, the Board has approved this Agreement with the Executive and authorized its execution and delivery on behalf of the Corporation.
Agreement:
1. Term of Agreement. The Agreement will begin on the Effective Date and will continue in effect through December 31, . On December 31, , and on the second anniversary date of each term thereafter (a “Renewal Date”), the term of this Agreement will be extended automatically for an additional two-year period unless, not later than 30 days prior to such Renewal Date, the Corporation gives written notice to the Executive that it has elected not to extend this Agreement. Notwithstanding the above, if a “Change of Control” (as defined herein) of the Corporation occurs during the term of this Agreement, the term of this Agreement will be extended for 36 months beyond the end of the month in which any such Change of Control occurs.
2. Definitions. The following defined terms shall have the meanings set forth below, for purposes of this Agreement:
(a) Annual Award. “Annual Award” means the cash payment paid or payable to the Executive with respect to a fiscal year under the Corporation’s Incentive Compensation Plan.
Tier III
(b) Base Annual Salary . “Base Annual Salary” means the greater of (1) the highest annual rate of base salary in effect for the Executive during the 12 month period immediately prior to a Change of Control or, (2) the annual rate of base salary in effect at the time Notice of Termination is given (or on the date employment is terminated if no Notice of Termination is required).
(c) Cause. “Cause” means any of the following:
(1) The Executive shall have committed a felony or an intentional act of gross misconduct, moral turpitude, fraud, embezzlement, or theft in connection with the Executive’s duties or in the course of the Executive’s employment with the Corporation or any Subsidiary, and the Board shall have determined that such act is materially harmful to the Corporation;
(2) The Corporation or any Subsidiary shall have been ordered or directed by any federal or state regulatory agency with jurisdiction to terminate or suspend the Executive’s employment and such order or directive has not been vacated or reversed upon appeal; or
(3) After being notified in writing by the Board to cease any particular Competitive Activity (as defined herein), the Executive shall have continued such Competitive Activity and the Board shall have determined that such act is materially harmful to the Corporation.
For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed “intentional” if it was due primarily to an error in judgment or negligence, but shall be deemed “intentional” only if done or omitted to be done by the Executive not in good faith and without reasonable belief that the Executive’s action or omission was in the best interest of the Corporation. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for “Cause” under this Agreement unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board at a meeting called and held for such purposes, after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive’s counsel (if the Executive chooses to have counsel present at such meeting), to be heard before the Board, finding that, in the good faith opinion of the Board, the Executive had committed an act constituting “Cause” as defined in this Agreement and specifying the particulars of the act constituting “Cause” in detail. Nothing in this Agreement will limit the right of the Executive or the Executive’s beneficiaries to contest the validity or propriety of any such determination.
(d) Change of Control. “Change of Control” means the occurrence of any of the following:
(1) Any “person” (as such term is used in Sections 13(d) and 14(d) of
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Tier III
the Exchange Act as in effect as of the date of this Agreement), other than the Corporation or any “person” who as of the Effective Date is a director or officer of the Corporation or whose shares of Common Stock of the Corporation are treated as “beneficially owned” (as such term is used in Rule 13d-3 of the Exchange Act as in effect as of the Effective Date) by any such director or officer, becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation’s then outstanding securities; or
(2) Individuals who, as of the Effective Date, constitute the Board of Directors of the Corporation (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election, was approved by a vote of at least a majority of the directors comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding for this purpose any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board; or
(3) Any of the following occurs:
(A) a merger or consolidation of the Corporation, other than a merger or consolidation in which the voting securities of the Corporation immediately prior to the merger or consolidation continue to represent (either by remaining outstanding or being converted into securities of the surviving entity) 51% or more of the combined voting power of the Corporation or surviving entity immediately after the merger or consolidation with another entity;
(B) a sale, exchange, lease, mortgage, pledge, transfer, or other disposition (in a single transaction or a series of related transactions) of all or substantially all of the assets of the Corporation which shall include, without limitation, the sale of assets or earning power aggregating more than 50% of the assets or earning power of the Corporation on a consolidated basis;
(C) a liquidation or dissolution of the Corporation;
(D) a reorganization, reverse stock split, or recapitalization of the Corporation which would result in any of the foregoing; or
(E) a transaction or series of related transactions having, directly or indirectly, the same effect as any of the foregoing.
- 3 -
Tier III
(e) Change Year. “Change Year” means the fiscal year in which a Change of Control occurs.
(f) Competitive Activity. “Competitive Activity” means that Executive’s participation, without the written consent of an officer of the Corporation, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Corporation and such enterprise’s revenues derived from any product or service competitive with any product or service of the Corporation amounted to 10% or more of such enterprise’s revenues for its most recently completed fiscal year and if the Corporation’s revenues for such product or service amounted to 10% of the Corporation’s revenues for its most recently completed fiscal year. “Competitive Activity” will not include (i) the mere ownership of securities in any such enterprise and the exercise of rights appurtenant thereto and (ii) participation in the management of any such enterprise other than in connection with the competitive operations of such enterprise.
(g) Disability. “Disability” means that, as a result of the Executive’s incapacity due to physical or mental illness, the Executive shall be eligible for the receipt of benefits under the Corporation’s long term disability plan.
(h) Employee Benefits . “Employee Benefits” means the perquisites, benefits, and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs, or arrangements in which the Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital, or other insurance (whether funded by actual insurance or self-insured by the Corporation), disability, salary continuation, expense reimbursement, and other employee benefit policies, plans, programs, or arrangements that may now exist or any equivalent successor policies, plans, programs, or arrangements that may be adopted hereafter, providing perquisites and benefits, at least as great in a monetary equivalent as are payable thereunder prior to a Change in Control.
(i) Employment Agreement. “Employment Agreement” means an executed employment agreement between the Corporation and the Executive.
(j) Good Reason. “Good Reason” means the occurrence of any one or more of the following:
(1) The assignment to the Executive after a Change in Control of the Corporation of duties which are materially and adversely different from or inconsistent with the duties, responsibilities, and status of the Executive’s position at any time during the 12 month period prior to such Change of Control, or which
- 4 -
Tier III
result in a significant change in the Executive’s authority and responsibility as a senior executive of the Corporation;
(2) A reduction by the Corporation in the Executive’s Base Annual Salary as of the day immediately prior to a Change of Control of the Corporation, or the failure to grant salary increases and bonus payments on a basis comparable to those granted to other executives of the Corporation, or a reduction of the Executive’s most recent highest incentive bonus potential prior to such Change of Control under the Corporation’s Incentive Compensation Plan, Long-Term Incentive Plan, or any successor plans;
(3) A demand by the Corporation that the Executive relocate to a location in excess of 35 miles from the location where the Executive is currently based, or in the event of any such relocation with the Executive’s express written consent, the failure of the Corporation or a Subsidiary to pay (or reimburse the Executive for) all reasonable moving expenses incurred by the Executive relating to a change of principal residence in connection with such relocation and to indemnify the Executive against any loss in the sale of the Executive’s principal residence in connection with any such change of residence, all to the effect that the Executive shall incur no loss on an after tax basis;
(4) The failure of the Corporation to obtain a satisfactory agreement from any successor to the Corporation to assume and agree to perform this Agreement, as contemplated in Section 14 of this Agreement;
(5) The failure of the Corporation to provide the Executive with substantially the same Employee Benefits that were provided to him immediately prior to the Change in Control, or with a package of Employee Benefits that, though one or more of such benefits may vary from those in effect immediately prior to such Change in Control, is substantially comparable in all material respects to such Employee Benefits taken as a whole; or
(6) Any reduction in the Executive’s compensation or benefits or adverse change in the Executive’s location or duties, if such reduction or adverse change occurs at any time after the commencement of any discussion with a third party relating to a possible Change of Control of the Corporation involving such third party, if such reduction or adverse change is in contemplation of such possible Change of Control and such Change of Control is actually consummated within 12 months after the date of such reduction or adverse change.
The existence of Good Reason shall not be affected by the Executive’s incapacity due to physical or mental illness. The Executive’s continued employment shall not constitute a waiver of the Executive’s rights with respect to any circumstance constituting Good Reason under this Agreement. The Executive’s determination of Good Reason shall be conclusive and binding upon the parties to this Agreement provided such
- 5 -
Tier III
determination has been made in good faith. Notwithstanding anything to the contrary in this Agreement, in the event that the Executive is serving as Chief Executive Officer of the Corporation immediately prior to the Change of Control, the occurrence of the Change of Control shall be conclusively deemed to constitute Good Reason.
(k) Highest Incentive Compensation. “Highest Incentive Compensation” means the greater of the Executive’s Potential Annual Award for the Executive’s Incentive Group for (a) the Change Year or (b) the fiscal year immediately preceding the Change Year. For purposes of (b) above, if the Executive first became a participant in the Corporation’s Incentive Compensation Plan for the Change Year, the Executive shall be deemed to have been a participant in the Corporation’s Incentive Compensation Plan, and in the same Incentive Group, for the fiscal year immediately preceding the Change Year.
(l) Highest Long-Term Incentive Compensation. “Highest Long-Term Incentive Compensation” means the greater of the Executive’s Potential Long-Term Award for the Executive’s Incentive Group pursuant to the Corporation’s Long-Term Incentive Compensation Plan for (1) the multi-year cycle in which the Change Year occurs or (2) the multi-year cycle immediately prior to the multi-year cycle in which the Change Year occurs; provided, however, that if the Change of Control occurs on a date that falls within two multi-year cycles, the Highest Long-Term Incentive Compensation shall mean the greater of the Executive’s Potential Long-Term Award for either of such multi-year cycles. If the Executive first became a participant in the Corporation’s Long-Term Incentive Compensation Plan during the Change Year or the year immediately preceding the Change Year, the Executive shall be deemed to have been a participant in the Corporation’s Long-Term Incentive Compensation Plan and in the same Incentive Group for (1) the multi-year cycle in which the Change Year occurs and the multi-year cycle immediately prior to the multi-year cycle in which the Change Year occurs or, (2) if the Change of Control occurs on a date that falls within two multi-year cycles, for both such multi-year cycles.
(m) Incentive Compensation Plan. “Incentive Compensation Plan” means the Corporation’s Incentive Compensation Plan in effect as of the effective date of this Agreement, as well as any successor plan.
(n) Incentive Group. “Incentive Group” means the group or category into which an Executive is placed pursuant to the Corporation’s Incentive Compensation Plan or Long-Term Incentive Compensation Plan, as the case may be.
(o) Long-Term Award. “Long-Term Award” means the total amount paid or payable at the end of a Performance Cycle under the Corporation’s Long-Term Incentive Compensation Plan.
(p) Long-Term Incentive Compensation Plan. “Long-Term Incentive Compensation Plan” means the Corporation’s 2001 Stock and Long-Term Incentive Plan
- 6 -
Tier III
effective as of February 21, 2001, as well as any successor plan. Should this Agreement require the computation of a Long-Term Award relating to periods prior to February 21, 2001, the term “Long-Term Incentive Plan” shall mean the Corporation’s Long-Term Incentive Compensation Plan that was first adopted in 1988, as amended from time to time.
(q) Notice of Termination. “Notice of Termination” means a written notice indicating the specific termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the employment under the provision so indicated.
(r) Performance Cycle . “Performance Cycle” means the two, three or four calendar year period designated under the Long-Term Incentive Compensation Plan, as the case may be.
(s) Potential Annual Award. “Potential Annual Award” means the maximum possible Annual Award the Executive could receive according to his or her Incentive Group pursuant to the Corporation’s Incentive Compensation Plan assuming that (1) the Corporation met the maximum Qualifying Performance Criteria for the Corporation’s Incentive Compensation Plan for a particular fiscal year (whether or not such maximum Qualifying Performance Criteria was or could be met); (2) there are no adjustments for business unit or individual performance, and (3) the Executive’s Base Annual Salary is used to determine the Potential Annual Award.
(t) Potential Long-Term Award. “Potential Long-Term Award” means the maximum possible Long-Term Award payable to the Executive pursuant to Executive’s Incentive Group assuming that (1) the Corporation met the maximum Qualifying Performance Criteria for the Corporation’s Long-Term Incentive Compensation Plan for a particular Performance Cycle (whether or not such maximum Qualifying Performance Criteria was or could be met); and (2) the Executive’s Base Annual Salary is used to determine the Potential Long-Term Award.
(u) Qualifying Performance Criteria. “Qualifying Performance Criteria” means any one or more of the performance criteria determined pursuant to the Incentive Compensation Plan or the Long-Term Incentive Compensation Plan, as applicable.
(v) Retirement. “Retirement” means having reached normal retirement age as defined in the Corporation’s noncontributory pension plan or taking early retirement in accordance with the terms of the Corporation’s noncontributory pension plan.
(w) Severance Benefits . “Severance Benefits” means the benefits described in Section 4 of this Agreement, as adjusted by the applicable provisions of Section 5 of this Agreement.
- 7 -
Tier III
(x) Stock Option Plans . “Stock Option Plans” means the Corporation’s 1990 Stock Option Plan, the 1994 Stock Option Plan, the 2001 Stock and Long-Term Incentive Plan, the Employee Stock Incentive Plan, and any other stock options plans that the Corporation may adopt from time to time.
(y) Subsidiary. “Subsidiary” means any corporation, bank, or other entity a majority of the voting control of which is directly or indirectly owned or controlled at the time by the Corporation.
(z) Transition Pay Plan . “Transition Pay Plan” means the Transition Pay Plan of the Corporation in effect as of the Effective Date of this Agreement, as well as any successor plan.
3. Eligibility for Severance Benefits. The Corporation or its successor shall pay or provide to the Executive the Severance Benefits if the Executive’s employment is terminated voluntarily or involuntarily during the term of this Agreement, either:
(a) by the Corporation (1) at any time within 36 months after a Change of Control of the Corporation, or (2) at any time prior to a Change of Control but after the commencement of any discussions with a third party relating to a possible Change of Control of the Corporation involving such third party, if such termination is in contemplation of such possible Change of Control and such Change of Control is actually consummated within 12 months after the date of such termination, in either case unless the termination is on account of the Executive’s death or Disability or for Cause, provided that, in the case of a termination on account of the Executive’s Disability or for Cause, the Corporation shall give Notice of Termination to the Executive with respect thereto; or
(b) by the Executive for Good Reason (1) at any time within 36 months after a Change of Control of the Corporation or (2) at any time after the commencement of any discussions with a third party relating to a possible Change of Control of the Corporation involving such third party, if such Change of Control is actually consummated within 12 months after the date of such termination, and, in any such case, provided that the Executive shall give Notice of Termination to the Corporation with respect thereto.
4. Severance Benefits . The Executive, if eligible under Section 3, shall receive the following Severance Benefits, adjusted by the applicable provisions of Section 5 (in addition to accrued compensation, deferred compensation, bonuses, and vested benefits and stock options):
(a) Base Annual Salary. In addition to any accrued compensation payable as of the Executive’s termination of employment (either by reason of an Employment Agreement or otherwise), a lump sum cash amount equal to the Executive’s Base Annual Salary, multiplied by 1.5.
(b) Annual Incentive Compensation. In addition to any compensation payable pursuant to Article 7 of the Corporation’s Incentive Compensation Plan, a lump
- 8 -
Tier III
sum cash amount equal to the Executive’s Highest Incentive Compensation, multiplied by 1.5. In order to be entitled to a payment pursuant to this Section 4(b), the Executive must have been a participant in the Corporation’s Incentive Compensation Plan at some time during the 12 month period immediately preceding the Change of Control.
(c) Long-Term Incentive Compensation. In addition to any accrued compensation payable pursuant to Article 13 of the Corporation’s Long-Term Incentive Compensation Plan, a lump sum cash amount equal to the Highest Long-Term Incentive Compensation, multiplied by 1.0. In order to be entitled to a payment pursuant to this Section 4(c), the Executive must have been a participant in the Corporation’s Long-Term Incentive Compensation Plan at some time during the 12 month period immediately preceding the Change of Control.
(d) Insurance Benefits. For an 18-month period after the date the employment is terminated, the Corporation will arrange to provide to the Executive at the Corporation’s expense, with:
(1) Health Care. Health care coverage comparable to that in effect for the Executive immediately prior to the termination (or, if more favorable to the Executive, that furnished generally to salaried employees of the Corporation), including, but not limited to, hospital, surgical, medical, dental, prescription, and dependent coverage. Upon the expiration of the health care benefits required to be provided pursuant to this subsection 4(d), the Executive shall be entitled to the continuation of such benefits under the provisions of the Consolidated Omnibus Budget Reconciliation Act. Health care benefits otherwise receivable by the Executive pursuant to this subsection 4(d) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the 18-month period following the date the employment is terminated and any such benefits actually received by the Executive shall be reported by the Executive to the Corporation.
(2) Life Insurance. Life and accidental death and dismemberment insurance coverage (including any supplemental coverage, purchase opportunity, and double indemnity for accidental death that was available to the Executive) equal (including policy terms) to that in effect at the time Notice of Termination is given (or on the date the employment is terminated if no Notice of Termination is required) or, if more favorable to the Executive, equal to that in effect at the date the Change of Control occurs.
(3) Disability Insurance. Disability insurance coverage (including policy terms) equal to that in effect at the time Notice of Termination is given (or on the date employment is terminated if no Notice of Termination is required) or, if more favorable to the Executive, equal to that in effect immediately prior to the Change of Control; provided, however, that no income replacement benefits will be payable under such disability policy with regard to the 18-month period
- 9 -
Tier III
following a termination of employment provided that the payments payable under subsections 4(b) and (c) above have been made.
In the event the Executive’s participation in any such plan or program is not permitted, the Corporation will directly provide, at no after-tax cost to the Executive, the benefits to which the Executive would be entitled under such plans and programs.
(e) Retirement Benefits. The Executive will be entitled to receive retirement benefits as provided herein, so that the total retirement benefits the Executive receives from the Corporation will approximate the total retirement benefits the Executive would have received under all (qualified and nonqualified) retirement plans (which shall not include severance plans) of the Corporation in which the Executive participates were the Executive fully vested under such retirement plans and had the Executive continued in the employ of the Corporation for 18 months following the date of the Executive’s termination or until the Executive’s Retirement, if earlier (provided that such additional period shall be inclusive of and shall not be in addition to any period of service credited under any severance plan of the Corporation). The benefits specified in this subsection will include all ancillary benefits, such as early retirement and survivor rights and benefits available at retirement. The amount payable to the Executive or the Executive’s beneficiaries under this subsection shall equal the excess of (1) the retirement benefits that would be paid to the Executive or the Executive’s beneficiaries, under all retirement plans of the Corporation in which the Executive participates if (A) the Executive were fully vested under such plans, (B) the 18-month period (or the period until the Executive’s Retirement, if less) following the date of the Executive’s termination were added to the Executive’s credited service under such plans, (C) the terms of such plans were those most favorable to the Executive in effect at any time during the period commencing prior to the Change of Control and ending on the date of Notice of Termination (or on the date employment is terminated if no Notice of Termination is required), and (D) the Executive’s highest average annual compensation as defined under such retirement plans and was calculated as if the Executive had been employed by the Corporation for a 18-month period (or the period until the Executive’s Retirement, if earlier) following the date of the Executive’s termination and had the Executive’s compensation during such period been equal to the Executive’s compensation used to calculate the Executive’s benefit under subsections 4(a), 4(b), and 4(c); over (2) the retirement benefits that are payable to the Executive or the Executive’s beneficiaries under all retirement plans of the Corporation in which the Executive participates. These retirement benefits specified in this subsection are to be provided on an unfunded basis, are not intended to meet the qualification requirements of Section 401 of the Internal Revenue Code, and shall be payable solely from the general assets of the Corporation. These retirement benefits shall be payable at the time and in the manner provided in the applicable retirement plans to which they relate.
(f) Outplacement. The Corporation shall pay all fees for outplacement services for the Executive up to a maximum equal to 15% of the Executive’s Annual Base
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Salary used to calculate the Executive’s benefit under subsection 4(a), plus provide a travel expense account of up to $5,000 to reimburse job search travel.
(g) Stock Options . Stock Options held by the Executive become exercisable upon a Change of Control according to the terms of the Corporation’s Stock Option Plans as interpreted by the Corporation’s Compensation Committee as such Committee existed immediately prior to the Change of Control.
In computing and determining Severance Benefits under subsections 4(a), (b), (c), (d), (e), (f), and (g) above, a decrease in the Executive’s salary, incentive bonus potential, or insurance benefits shall be disregarded if such decrease occurs within six months before a Change of Control, is in contemplation of such Change of Control, and is taken to avoid the effect of this Agreement should such action be taken after such Change of Control. In such event, the salary, incentive bonus potential, and/or insurance benefits used to determine Severance Benefits shall be that in effect immediately before the decrease that is disregarded pursuant to this Section 4.
The Severance Benefits provided in subsections 4(a), (b), and (c) above shall be paid not later than 45 business days following the date the Executive’s employment terminates.
5. Adjustments to Severance and Similar Payments.
(a) Limitation on Amount. Notwithstanding anything in this Agreement to the contrary, any Severance Benefit, Employee Benefits, acceleration of stock option vesting, or similar benefit or amount payable or to be provided to the Executive by the Corporation or its affiliates, whether pursuant to this Agreement or otherwise, which is a Parachute Payment as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the “Code”), shall be modified or reduced in the manner provided in Section 5(b) below to the extent necessary so that the benefits payable or to be provided to the Executive under this Agreement that are treated as Parachute Payments, as well as any payments or benefits provided outside of this Agreement that are so treated, shall not cause the Corporation to have paid an Excess Parachute Payment as defined in Section 280G(b)(1) of the Code. In computing such amount, the parties shall take into account all provisions of Code Section 280G, including making appropriate adjustments to such calculation for amounts established to be Reasonable Compensation as defined in Section 280G(b)(4) of the Code. The determination of whether an amount is a Parachute Payment or Excess Parachute Payment will be made by a Certified Public Account selected by the Corporation.
(b) Modification of Amount. In the event that the amount of any Parachute Payments that would be payable to or for the benefit of the Executive under this Agreement must be modified or reduced to comply with this provision, the Executive shall direct which Parachute Payments are to be modified or reduced; provided, however, that no increase in the amount of any payment or change in the timing of the payment shall be made without the consent of Corporation.
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(c) Avoidance of Penalty Taxes. This Section 5 shall be interpreted so as to avoid the imposition of excise taxes on the Executive under Section 4999 of the Code or the disallowance of a deduction to the Corporation pursuant to Section 280G(a) of the Code with respect to amounts payable under this Agreement or otherwise.
(d) Additional Limitation. In addition to the limits otherwise provided in this Section 5, to the extent permitted by law, the Executive may in his/her sole discretion elect to reduce any payments he/she may be eligible to receive under this Agreement to prevent the imposition of excise taxes on the Executive under Section 4999 of the Code.
6. Withholding of Taxes. The Corporation may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as required by law.
7. Acknowledgement. The Corporation hereby acknowledges that it will be difficult and may be impossible for the Executive to find reasonably comparable employment, or to measure the amount of damages which the Executive may suffer as a result of termination of employment hereunder. Accordingly, the payment of the Severance Benefits by the Corporation to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Corporation to be reasonable and will be liquidated damages, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings, or other benefits from any source whatsoever create any mitigation, offset, reduction, or any other obligation on the part of the Executive hereunder or otherwise, except for a reduction in health insurance coverage as provided in subsection 4(d)(1). The Corporation shall not be entitled to set off or counterclaim against amounts payable hereunder with respect to any claim, debt, or obligation of the Executive.
8. Enforcement Costs; Interest. The Corporation is aware that, upon the occurrence of a Change in Control, the Board or a stockholder of the Corporation may then cause or attempt to cause the Corporation to refuse to comply with its obligations under this Agreement, or may cause or attempt to cause the Corporation to institute, or may institute, litigation, arbitration, or other legal action seeking to have this Agreement declared unenforceable, or may take, or attempt to take, other action to deny the Executive the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of the Corporation that the Executive not be required to incur the expenses associated with the enforcement of the Executive’s rights under this Agreement by litigation, arbitration, or other legal action nor be bound to negotiate any settlement of the Executive’s rights hereunder under threat of incurring such expenses because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive under this Agreement. Accordingly, if following a Change in Control it should appear to the Executive that the Corporation has failed to comply with any of its obligations under this Agreement, including the proper calculation of the Severance Payment or Excess Severance Payment, or in the event that the Corporation or any other person takes any action to declare this Agreement void or unenforceable, or institute any litigation or other legal action designed to
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deny, diminish, or to recover from the Executive, the benefits intended to be provided to the Executive hereunder, the Corporation irrevocably authorizes the Executive from time to time to retain counsel (legal and accounting) of the Executive’s choice at the expense of the Corporation as provided in this Section 8 to represent the Executive in connection with the calculation of the Severance Payment or Excess Severance Payment, or the initiation or defense of any litigation or other legal action, whether by or against the Corporation or any director, officer, stockholder, or other person affiliated with the Corporation. Notwithstanding any existing or prior attorney-client relationship between the Corporation and such counsel, the Corporation irrevocably consents to the Executive entering into an attorney-client relationship with such counsel, and in that connection the Corporation and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. The reasonable fees and expenses of counsel selected from time to time by the Executive as provided in this Section shall be paid or reimbursed to the Executive by the Corporation on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by such counsel in accordance with its customary practices. In any action involving this Agreement, the Executive shall be entitled to prejudgment interest on any amounts found to be due him from the date such amounts would have been payable to the Executive pursuant to this Agreement at an annual rate of interest equal to the prime commercial rate in effect at The Huntington National Bank or its successor from time to time during the prejudgment period plus 4 percent.
9. Indemnification. From and after the earliest to occur of a Change of Control or termination of employment, the Corporation shall (a) for a period of five years after such occurrence, provide the Executive (including the Executive’s heirs, executors, and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at the Corporation’s expense, and (b) indemnify and hold harmless the Executive, to the fullest extent permitted or authorized by the law of the State of Maryland as it may from time to time be amended, if the Executive is (whether before or after the Change of Control) made or threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, by reason of the fact that the Executive is or was a director, officer, or employee of the Corporation or any Subsidiary, or is or was serving at the request of the Corporation or any Subsidiary as a director, trustee, officer, or employee of a bank, corporation, partnership, joint venture, trust, or other enterprise. The indemnification provided by this Section 9 shall not be deemed exclusive of any other rights to which the Executive may be entitled under the charter or bylaws of the Corporation or of any Subsidiary, or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in the Executive’s official capacity and as to action in another capacity while holding such office, and shall continue as to the Executive after the Executive has ceased to be a director, trustee, officer, or employee and shall inure to the benefit of the heirs, executors, and administrators of the Executive.
10. Arbitration. The initial method for resolving any dispute arising out of this Agreement shall be nonbinding arbitration in accordance with this Section. Except as provided otherwise in this Section, arbitration pursuant to this Section shall be governed by the Commercial Arbitration Rules of the American Arbitration Association. A party wishing to obtain arbitration of an issue shall deliver written notice to the other party, including a
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description of the issue to be arbitrated. Within 15 days after either party demands arbitration, the Corporation and the Executive shall each appoint an arbitrator. Within 15 additional days, these two arbitrators shall appoint the third arbitrator by mutual agreement; if they fail to agree within this 15 day period, then the third arbitrator shall be selected promptly pursuant to the rules of the American Arbitration Association for Commercial Arbitration. The arbitration panel shall hold a hearing in Columbus, Ohio, within 90 days after the appointment of the third arbitrator. The fees and expenses of the arbitrator, and any American Arbitration Association fees, shall be paid by the Corporation. Both the Corporation and the Executive may be represented by counsel (legal and accounting) and may present testimony and other evidence at the hearing. Within 90 days after commencement of the hearing, the arbitration panel will issue a written decision; the majority vote of two of the three arbitrators shall control. The majority decision of the arbitrators shall not be binding on the parties, and the parties may pursue other available legal remedies if the parties are not satisfied with the majority decision of the arbitrator. The Executive shall be entitled to seek specific performances of the Executive’s rights under this Agreement during the pendency of any dispute or controversy arising under or in connection with this Agreement.
11. Employment Rights. This Agreement sets forth the Severance Benefits payable to the Executive in the event the Executive’s employment with the Corporation is terminated under certain conditions specified in Section 3. This Agreement is not an employment contract nor shall it confer upon the Executive any right to continue in the employ of the Corporation or its Subsidiaries and shall not in any way affect the right of the Corporation or its Subsidiaries to dismiss or otherwise terminate the Executive’s employment at any time with or without cause.
12. Arrangements Not Exclusive. The specific benefit arrangements referred to in this Agreement are not intended to exclude the Executive from participation in or from other benefits available to executive personnel generally or to preclude the Executive’s right to other compensation or benefits as may be authorized by the Board at any time. The provisions of this Agreement and any payments provided for hereunder shall not reduce any amounts otherwise payable, or in any way diminish the Executive’s existing rights, or rights which would accrue solely as the result of the passage of time under any compensation plan, benefit plan, incentive plan, stock option plan, employment agreement, or other contract, plan, or arrangement except as may be specified in such contract, plan, or arrangement. Notwithstanding anything to the contrary in this Section 12, the Severance Benefits provided in Section 4 are in lieu of any benefits to which the Executive would be entitled following the termination of his or her employment pursuant to any Employment Agreement or pursuant to the Corporation’s Transition Pay Plan or any successor to such plan.
13. Termination. Except for termination of employment described in Section 3, this Agreement shall terminate if the employment of the Executive with the Corporation shall terminate prior to a Change in Control.
14. Successors; Binding Agreements. This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. The Executive’s rights and
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benefits under this Agreement may not be assigned, except that if the Executive dies while any amount would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement, to the beneficiaries designated by the Executive to receive benefits under this Agreement in a writing on file with the Corporation at the time of the Executive’s death or, if there is no such beneficiary, to the Executive’s estate. The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Corporation (or of any division or Subsidiary thereof employing the Executive) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Corporation in the same amount and on the same terms to which the Executive would be entitled hereunder if the Executive terminated employment for Good Reason following a Change of Control.
15. No Vested Interest. Neither the Executive nor the Executive’s beneficiaries shall have any right, title, or interest in any benefit under this Agreement prior to the occurrence of the right to the payment of such benefit.
16. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the such addresses as each party may designate from time to time to the other party in writing in the manner provided herein. Unless designated otherwise notices to the Corporation should be sent to the Corporation at:
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Huntington Bancshares Incorporated
41 South High Street Columbus, Ohio 43287 Attention: Cindy Rohletter/Corporate Compensation |
Until designated otherwise, notices shall be sent to the employee at the address indicated on the Beneficiary Designation and Notice form attached hereto as Exhibit A. If the parties by mutual agreement supply each other with telecopier numbers for the purposes of providing notice by facsimile, such notice shall also be proper notice under this Agreement. Notice sent by certified or registered mail shall be effective two days after deposit by delivery to the U.S. Post Office.
17. Savings Clause. If any payments otherwise payable to the Executive under this Agreement are prohibited or limited by any statute or regulation in effect at the time the payments would otherwise be payable, including, without limitation, any regulation issued by the Federal Deposit Insurance Company (the “FDIC”) that limits executive change of control payments that can be made by an FDIC insured institution or its holding company if the institution is financially troubled (any such limiting statute or regulation a “Limiting Rule”):
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(a) Corporation will use its best efforts to obtain the consent of the appropriate governmental agency (whether the FDIC or any other agency) to the payment by Corporation to the Executive of the maximum amount that is permitted (up to the amounts that would be due to the Executive absent the Limiting Rule); and
(b) the Executive will be entitled to elect to have apply, and therefore to receive benefits directly under, either (i) this Agreement (as limited by the Limiting Rule) or (ii) any generally applicable Corporation severance, separation pay, and/or salary continuation plan that may be in effect at the time of the Executive’s termination.
Following any such election, the Executive will be entitled to receive benefits under this agreement or plan elected only if and to the extent the agreement or plan is applicable and subject to its specific terms.
18. Amendment; Waiver. This Agreement may not be amended or modified and no provision may be waived unless such amendment, modification, or waiver is agreed to in writing and signed by the Executive and the Corporation.
19. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
20. Prior Executive Agreements. This Agreement supersedes any and all prior Executive Agreements between the Corporation (or any predecessor of the Corporation) and the Executive and no payments or benefits of any kind shall be made under, on account of, or by reference to the prior Executive Agreements.
21. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
22. Governing Law. Except as otherwise provided, this Agreement shall be governed by the laws of the State of Ohio, without giving effect to any conflict of law provisions.
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In witness whereof, the parties have signed this Agreement as of the day and year written above.
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HUNTINGTON BANCSHARES INCORPORATED |
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Exhibit A
Beneficiary Designation and Notice Form
Beneficiary Designation
In the event of my death, I direct that any amounts due me under the Agreement to which this Beneficiary Designation is attached shall be distributed to the person designated below. If no beneficiary shall be living to receive such assets they shall be paid to the administrator or executor of my estate.
Notice
Until notified otherwise, pursuant to Section 16 of the Agreement, notices should be sent to me at the following address
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Exhibit 10(b)
Schedule Identifying Material Details of Executive Agreements
Schedule Identifying Material Details of Executive Agreements
Schedule Identifying Material Details of Executive Agreements
Substantially Similar to Exhibit 10(a) of Huntington’s Annual Report on
Form 10-K for the year ended December 31, 2002
Name
Effective Date
May 16, 2001
February 15, 2001
November 14, 2000
Substantially Similar to Exhibit 10(b) of Huntington’s Annual Report on
Form 10-K for the year ended December 31, 2002
Name
Effective Date
August 16, 2000
May 4, 1998
July 16, 2002
February 26, 2002
Substantially Similar to Exhibit 10(a) of Huntington’s Quarterly Report
Form 10-Q for the quarter ended September 30, 2004
Name
Effective Date
July 14, 2004
CERTIFICATION
I, Thomas E. Hoaglin, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Huntington Bancshares Incorporated; | ||||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; | ||||
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: | ||||
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and | ||||
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||||
| c) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | ||||
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and | |||
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. | |||
Date: November 4, 2004
| /s/ Thomas E. Hoaglin | ||||
| Thomas E. Hoaglin | ||||
| Chief Executive Officer | ||||
CERTIFICATION
I, Donald R. Kimble, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Huntington Bancshares Incorporated; | ||||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; | ||||
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: | ||||
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and | ||||
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||||
| c) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | ||||
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and | ||||
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. | ||||
Date: November 4, 2004
| /s/ Donald R. Kimble | ||||
| Donald R. Kimble | ||||
| Chief Financial Officer and Controller | ||||
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of Huntington Bancshares Incorporated (the “Company”) on Form 10-Q for the three month period ended September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas E. Hoaglin, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Thomas E. Hoaglin | |
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Thomas E. Hoaglin | |
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Chief Executive Officer | |
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November 4, 2004 |
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of Huntington Bancshares Incorporated (the “Company”) on Form 10-Q for the three month period ended September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Donald R. Kimble, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Donald R. Kimble | |
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Donald R. Kimble | |
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Chief Financial Officer and Controller | |
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November 4, 2004 |